Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19
Gold Price Gann Angle Update - 10th July 19
Crude Oil Prices and the 2019 Hurricane Season - 10th July 19
Can Gold Recover from Friday’s Strong Payrolls Hit? - 10th July 19
Netflix’s Worst Nightmare Has Come True - 10th July 19
LIMITLESS - Improving Cognitive Function and Fighting Brain Ageing Right Now! - 10th July 19
US Dollar Strength Will Drive Markets Higher - 10th July 19
Government-Pumped Student Loan Bubble Sets Up Next Financial Crisis - 10th July 19
Stock Market SPX 3000 Dream is Pushed Away: Pullback of 5-10% is Coming - 10th July 19
July 2019 GBPUSD Market Update and Outlook - 10th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Why Shake Shack Stock Is a Bad Investment

Companies / Investing 2015 May 23, 2015 - 10:18 AM GMT

By: ...

Companies Keith Fitz-Gerald writes: Millions of investors and everyday Americans have discovered Shake Shack’s high-end hamburgers. They taste great, and the new chain is a snazzy place to hang out.

Logically, they assume that the novel experience will translate into a great investment. Indeed, SHAK gained 8.47% in yesterday’s trading session to close near $90 (an all-time high), thanks in part to headlines from this week like these:

Is Shake Shack The New Chipotle? – Yahoo! Finance

Shake Shack Is Considering a Chik-Fil-A Killer – Business Insider

Shake Shack Continues to Defy Gravity, Surges to Fresh All-Time Highs –

My favorite piece of punditry this week came from CNBC’s Jim Cramer, who dubbed Shake Shack “the Tesla of burgers.”

Nonsense – sure both stocks are volatile, but TSLA investors can be glad the similarities stop there.

Recent investing history has been very clear about the ultimate fates for companies like Shake Shack – and investors should pay attention. There are undeniable parallels between Shake Shack and another infamous stock story in investing circles.

Here’s why investors would be wise to avoid Wall Street’s new darling.

Shake Shack Reminds Me of Krispy Kreme

They say those who fail to understand history are doomed to repeat it. I don’t disagree.

The markets display a tremendous propensity for cycles and patterns. Not surprisingly, many investors focus on what’s worked in the past, logically expecting it to work in the future.

That’s okay if you have the ability to incorporate change in your routine like a trader and the strict risk management discipline to go with it. Unfortunately, most investors don’t. So they keep doing the same thing over and over yet expect different results.

This makes no sense whatsoever, especially when you have glaring examples of prior market action staring you in the face under very similar circumstances.

Take Krispy Kreme Donuts Inc. (NYSE:KKD), for example.

The much-loved donut chain IPOed on April 5, 2000 at $21 a share. Just over a year later it jumped to the New York Stock Exchange on May 17, 2001.

By 2003 the company’s stock had reached an all-time high of nearly $50 a share. In 2004 it reported sales of $665.6 million generated by nearly 400 stores and profits of $94.7 million.

Analysts were falling all over themselves to recommend Krispy Kreme. I recall the trading community abuzz with glowing language used to describe the company. Phrases like, “rapid expansion and solid fundamentals,” “growing customer loyalty,” “steadily increasing earnings,” and “unrealized potential” all made the rounds.

It was too rich for my blood. I remember thinking at the time that there was no way people would eat enough donuts to support the stock’s lofty valuations.

By February 2005, the stock had lost 85% of its value following missed estimates and the company’s first public losses in May 2004. Today it still trades at only 39% of its peak.


Source: Yahoo! FinanceAt the time of the meltdown, CEO Scott Livengood offered the almost-plausible explanation that millions of Americans following the high-protein Atkins diet had elected not to eat his company’s products. “Killed the market” would have been a more accurate description, considering the company announced a turnaround plan intended to avoid bankruptcy not long after.

In reality, Krispy Kreme did what many newly cash-flush IPO companies do: pursued growth at any cost. The reasoning was that customers would inevitably follow growth. So would investors hoping to cash in on a quick buck.

You know like I do that there’s no such thing as a “free lunch” – pun absolutely intended.

Anything new goes through a honeymoon period. From shoes to hamburgers, the public loves to try new stuff. It’s the American Way. Krispy Kreme was no different, but that didn’t make it a great investment then any more than Shake Shack is today.

Novelty wears off. Management actually has to prove it understands how to run a business, not just make fantastic donuts using a fabulous recipe. Neither Dunkin Donuts nor McDonald’s experienced the “Atkins effect,” in case you’re wondering.

And that brings me full circle… how do you know if Shake Shack is going to be a repeat of Krispy Kreme?

First, take a look at the chart.

Obviously, there are some similarities. Despite the fact that the two IPOs are years apart, you can clearly see the unbridled enthusiasm reflected in how fast prices rose and are rising, especially if you look at the first 250 days of trading.

More often than not, what goes up that fast… well, you can finish that sentence.

Second, consider the story being used to sell both its hamburgers and the company “line.”

Krispy Kreme was based on a super recipe and a lot of corporate mumbo jumbo, not to mention pre-IPO profitability that, by all accounts, had been great. They still make great donuts. My point, though, is that prices reflected a lovefest made all that much sweeter by its products.

Much of the Shake Shack mystique centers on something similar. Only this time around it’s the cult of management and a team with the “personality to please.” The concept of “Enlightened Hospitality” plays heavily, too. By this management means caring for customers, employees, suppliers and each other. But the dead giveaway is that management believes in training for qualities that “cannot be taught.” Look at the website and you’ll see what I mean very quickly.

CEO Randy Garutti is almost dismissive of anybody who questions the party line. He noted to analysts that Shake Shack is for people who “have a higher expectation when they go out to eat a burger.”

If Shake Shack were a tech company, you’d be hearing about how the company “resonates” with customers or provides a “solutions focused product” and something that’s “solomo,” which is how techno-obsessed Silicon Valley types describe any business that is social, local, and mobile.

My point is that any time a company has to resort to intangibles, you ought to immediately look deeper to see what’s real. Then, as now, there’s plenty of buzzword speak and social positioning that makes me wonder if management really understands where it’s going.

And, third, take a good hard look at the numbers.

Shake Shack just reported its first full quarter with an earnings beat and raised guidance. The stock price soared. Revenue rose 56.3% while EPS doubled. And the stock is now trading at around $89.95, more than 4x the $21 per share IPO.

That sounds great, but let’s put those numbers in perspective.

We’re talking about a company that just earned $0.04 a share on revenue of $37.8 million. The company wants to expand to a mere 400 locations.

Call me crazy but is SHAK really worth $3.25 billion under the circumstances?

At $9 a burger and a 50% profit margin (just to be generous for illustrative purposes), that works out to the company having to sell more than 722 million burgers – McDonald’s-like numbers. But McDonald’s has 36,000 locations and sports a market cap of $93.45 billion, while Shake Shack had only 63 stores at the time of its IPO earlier this year. I’m just sayin’…

Right now Shack Shake’s PE Ratio is a staggering 1,285. By comparison, the S&P 500 Index carries an average PE ratio of 15.54 right now, and that’s considered expensive by most professionals. The Tech Bubble crashed at a PE of 26.6.

I realize that’s tough to wrap your mind around in today’s media addled world, so let me put it to you in plain English. A PE ratio of 1,285 means you’ll have to wait nearly 1,285 years to make any money you invest in Shake Shack back at the company’s current earnings rate.

To be fair, critics say that the PE ratio is a static measure. And, they’re right. It is. The PE ratio is a snapshot that freezes a company – in this case Shake Shack – at a specific moment in time.

That’s why I also encourage you to take a look at the PEG Ratio. That’s the ratio of P/E to growth. As such, it’s a reflection of price as a function of expected earnings over a given time frame.

Shake Shack’s PEG Ratio based on five years of projected earnings is 21.24. By comparison, the markets are regarded as having a PEG of 1. Anything less is a bargain. Anything more is expensive. The average fast food chain sports a PEG of 3.04 and Chipotle’s PEG is 1.68. So, if you’re buying SHAK stock, you’re implicitly agreeing that it’s worth a 598.68% premium to the rest of the industry given growth expectations. Then there’s the float – meaning shares freely traded. Shake Shack’s is razor-thin until the lock-up period expires in July. It’s worth noting that there are no options trading yet either. That means traders cannot effectively hedge their positions. So what you have is a recipe for higher prices that don’t necessarily reflect realistic valuations.

With numbers like these, Shake Shack has no business in an investor’s portfolio. If you’re a nimble trader, have plenty of money to burn, and above-average risk management skills, then maybe it’s worth your time to dabble. But 99% of investors aren’t in that position.

Whether it’s a bad earnings report that shatters the myth around the stock – and sends SHAK crashing down to more realistic valuations – or something like the Atkins Diet, Shake Shack will come back down to earth.

And that brings me to another point – in fact, THE point.

Disregard Hype-Driven Stocks to Focus on Our Unstoppable Trends

Like Krispy Kreme, SHAK’s stock has been sent into the stratosphere – however temporarily – by breathless reports from Wall Street and a hungry market fascinated by company products that are novel and even delicious.

But it’s not enough for a company to be flashy, novel, and even impressively innovative in its sector. For it to be a “Buy” opportunity worthy of the Total Wealth community, it has to be tied into at least one of the six Trends. Anything else carries unnecessary and unjustified risk.

A lot of people, however, might say that a company selling food is automatically tapped into the Demographics Trend. After all, the human population on Earth is set to soar in the coming decades, providing guaranteed growth in demand.

But keep in mind that fast food is a consumer discretionary item, meaning that it’s something people can and will make do without in troubled economic times. It’s not a “must-have” because, quite simply, no one needs to have it. They only want it – and reliably indulge in it only in good economic times.

There are plenty of food chains that are much more reliable plays to tap the Demographics Trend – and as I monitor them carefully, the Total Wealth Family will be the first to know.

In the meantime, we’ll focus on the Unstoppable Trends for profits that beat the markets and stand the test of time.

After all, companies that channel them successfully can’t be stopped by anything – be it Fed meddling, war, disease, global financial meltdown, and yes, even the Atkins Diet.

Until next time,

Keith Fitz-Gerald

Source :

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules