As most investors know, holding onto a stock right around the time earnings reports are released can land you in a tight spot. Often companies can suffer even if their quarterly results are good — at least, if Wall Street doesn’t think they’re “good enough.”
That seems to be the case with Shake Shack Inc (SHAK), which fell sharply after reporting earnings despite boasting strong numbers.
The company beat on the bottom line with earnings of $0.14 a share, and revenue of $66.5 million also beat. Both were up strongly over last year. So why has SHAK pulled back from its upward trend?
Part of the reason is because of the lack of growth in same-store sales, which decelerated to 4.5% from 12.9%. Despite topping estimates otherwise, the decline was enough to trigger concerns of overvaluation in investors.
Generally speaking, that rate of growth isn’t objectively bad — comparable sales at McDonald’s Corporation (MCD) grew by 3.1% in the same quarter, for example. However, SHAK is burdened with a sky-high multiple given its youth and smaller store count, leaving traders cautious to stay in the name if there is even a hint of a slowing growth ramp.
It certainly doesn’t help that the mood on Wall Street is against restaurants in general.
Bottom Line for SHAK Stock
But all is not lost for this stock. Same-store sales failed to impress, but revenue still popped 37% and management also increased full-year guidance to $253-$256 million from $245-249 million. Management is optimistic that opening an additional two store locations in the U.S., upping the number from 16 to 18, will help carry strong earnings through the end of the year.
The risk-reward ratio has shifted to the downside, but much of this selloff is an overreaction that ignores the long-term potential of this popular burger chain. I’d like to see a lot more store openings, but that might mean diluting the shares.
Nonetheless, there is a chance this stock lives up to the hype over the long term although I will add the caveat that it’s a higher-than-normal risk.
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