Years from now, when we look back on The Great Shake Shack Inc (NYSE:SHAK) Plunge of 2015, some of us will ask ourselves: “Why? Why did I buy that rotten thing?”
I’m writing this article so you can avoid that fate. SHAK stock is the closest thing to literal garbage on Wall Street. But then again, garbage can’t really lose you money, so … I guess Shake Shack stock is actually worse than garbage.
SHAK stock roared to all-time highs on Thursday, adding as much as 10% after Shake Shack’s parent company filed a trademark application for the term “Chicken Shack.”
Is This Real Life?
Overvaluation has been a concern for SHAK stock literally since Day 1. The Shake Shack IPO brought with it a frenzied rush of buying, and by the end of the day, a burger-crazed Wall Street had bid SHAK stock up 130%. Tom Taulli of InvestorPlace noted how absurdly overvalued SHAK stock was at those levels … and the stock has roughly doubled since then:
“The valuation on SHAK stock is at a nosebleed 16 times sales, which resembles a cloud operator more than it does a burger joint.
“But to put things in perspective, rival HABT is currently trading at 1.8 times sales, while El Pollo LoCo Holdings Inc (NASDAQ:LOCO) is at 3X. Larger fast-casual companies are much cheaper, too — Chipotle Mexican Grill, Inc. (NYSE:CMG) is at 5.7X and Panera Bread Co (NASDAQ:PNRA) sports a multiple of 1.8X.”
Sort of insane, right? Yes, it is. Until you look at an even more ridiculous comparison courtesy of the boundless flow of financial cynicism, ZeroHedge:
That, my friends, is a telling graph. What it tells us is that the current market value of SHAK stock gives each of Shake Shack’s 66 locations a value of nearly $50 million per restaurant.
Which is absurd.
SHAK is far more richly valued than Chipotle, arguably the most successful fast-casual dining concept of all time — in fact, the comparison isn’t even close. Others in the industry like Zoe’s Kitchen Inc (NYSE:ZOES) and newly public Bojangles Inc (NASDAQ:BOJA) aren’t in the same neighborhood, either.
Today’s SHAK stock rally doesn’t even make sense in a vacuum.
I can see why, all things being equal, shares would rise. If Shake Shack could seriously threaten the likes of Chick-Fil-A and KFC, shares would be worthy of a big day.
But all things are not equal. All things are wildly out of proportion.
Chick-Fil-A has more than 1,900 stores, spanning 42 states and Washington, D.C. And KFC, for its part, boasts a whopping 14,197 locations across the globe. Shake Shack? Through April 1, it had 66 locations — worldwide.
Shake Shack stock unfortunately isn’t available to short at the moment. But the day you can sell SHAK short (or buy put options on it), I’ll be a happy man. If you’re in SHAK stock, please consider getting out … hastily. The end is near.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.