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Gorging on Krispy Kreme

November 21, 2013, 12:37 PM UTC

Call it doughnut déjà vu. Krispy Kreme, the venerable doughnut maker based in Winston-Salem, N.C., is in the midst of a major stock run-up. At a recent $25, its shares have tripled in the past year and have risen around 900% over the past five years. Like its signature product when it rolls out of the oven, its stock is extremely “hot now.” Sound familiar? It should. This is the second episode of Krispy Kreme mania in the market in just over a decade.

The first time investors fell for Krispy Kreme was right after its IPO — and just about the time the dotcom bubble was bursting in 2000. For a time, KKD shares appeared impervious to gravity. The stock split twice in 2001 alone and kept going higher. In a 2003 cover story, Fortune called Krispy Kreme “America’s hottest brand.” But then, burned by an accounting scandal, the low-carb diet craze, and its own overexpansion, Krispy Kreme tanked. By 2009 the stock had fallen from a split-adjusted high near $50 to $1. The depth of that collapse has made Krispy Kreme’s comeback even more compelling. “It’s risen from the dead as a company,” says Tony Brenner, an analyst with Roth Capital Partners.

Brenner credits Krispy Kreme CEO Jim Morgan, who took over in 2008, and his team with leading the turnaround. The company closed poor-performing stores, cut costs, deemphasized its less profitable business of selling doughnuts in grocery stores, and boosted same-store sales.

With its fiscal house in order, Krispy Kreme is back in expansion mode, and investors see lots of potential. The company has only 790 stores — compared with Dunkin’ Donuts’ 10,795 — and only 244 of them are in the U.S. (Globally, it’s growing fast in Asia and has 100 stores in Saudi Arabia alone.) “There’s an awful lot of white space,” says Brenner of Krispy Kreme’s growth opportunity.

The company is expanding more thoughtfully this time, with a smaller, more profitable store format that’s better suited to urban locations. Bullish investors like Andrew Cupps of $1.6 billion Cupps Capital Management which started buying Krispy Kreme in January when the stock was at $11 and now holds a 2.4% stake, consider the new format a key to future growth. One hope is that it will attract a new (and more Dunkin’-like) customer: the daily breakfaster.

Analysts agree that Krispy Kreme’s prospects are healthy (unlike its core product). But the stock is hardly cheap, trading at 75 times trailing 12-month earnings, vs. a P/E of 18 for the S&P 500. “There’s risk embedded in it, given its high valuation,” says analyst Conrad Lyon of B. Riley & Co. At this point, investors may be best served by saying no to doughnuts. Just like the last time Krispy Kreme rose so high, it might have to go down before it goes up again.

This story is from the December 09, 2013 issue of Fortune.