Shares of Shake Shack Inc (SHAK) were once the darling of Wall Street. But, like all things, Shake Shack’s rip-roaring ride on Wall Street had to come to an end at some point.
SHAK stock roared from its $21 IPO price in January to highs above $96 in May before investors realized they’d become a little too euphoric about the burger joint’s prospects and took some profits.
But the real beginning of the end for Shake Shack shares didn’t start until August, when SHAK announced a secondary offering of four million shares for $60 per share — well below the $70 levels it was flirting with at the time.
The stock has pretty much traded in the $45-to-$50 range ever since.
Well, buckle up SHAK stock owners, there’s about to be a new trading range — a much, much lower one.
ANOTHER Secondary Offering
Apparently one secondary offering wasn’t enough. Early investors want to cash out of the stock and cash out now. The Shake Shack secondary offering in August was for just four million shares.
In a Thursday filing with the Securities and Exchange Commission, SHAK announced this second secondary offering could be more than six times that size, with up to 26 million shares set to flood the Street.
SHAK stock was off more than 8% in early trading on the news, trading below the $45 level.
Damage done, right?
Wrong. I think there’s easily another 20% that the markets could knock off of SHAK stock, and wouldn’t be surprised to see it trading in the mid-to-low $30s by the time 2016 comes around.
Here’s why you should avoid Shake Shack stock at all costs, especially after this newest SEC filing:
This Offering Won’t Help SHAK Stock
It’s not only that the massive influx of new shares will likely force an imbalance of buyers and sellers, forcing prices lower (although it will do that.) Perhaps the more glaring problem here is that all 26 million shares of SHAK stock are being unloaded by company insiders — meaning the company won’t see a dime from this massive offering.
That’s zero additional capital the company can use to grow and expand its business. Not very helpful, especially when Wall Street is valuing SHAK stock as if it were a cloud computing company, not a burger joint with a mere 71 locations.
Shake Shack shares currently trade at roughly 150 times forward earnings. That’s well above the valuations fetched by some of tech’s hottest growth companies like Facebook (FB), Salesforce.com (CRM) and Fortinet (FTNT).
Hey, if I were an insider I’d wanna sell out too.
But as an individual investor, don’t be the one who buys it from them … because there’s more pain to come.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
