Shake Shack Inc (SHAK) stock was initiated with a $45 price target and “buy” rating at Buckingham Research on Thursday. That implies a 29% upside from Wednesday’s closing price at $34.88.
Shares of SHAK stock are up about 3% in midday trading today.
Analysts can be helpful to individual investors, especially when they turn to obscure resources that everyday investors don’t have access to like store-check data, results of proprietary models and access to various industry experts.
Unfortunately, this greater access to information and expertise doesn’t mean you’ll be better served by following analyst recommendations.
I’m afraid the recommendation to buy SHAK stock, a wildly overvalued speculative play on a popular burger chain, is poorly conceived. Before getting into why Buckingham is wrong on Shake Shack stock, let me briefly touch on the unreliability of analysts, whose opinions can be put on a pedestal by individual investors.
SHAK Stock: No Thanks, Guys
A 2013 academic survey of 365 Wall Street sell-side analysts shone a fascinating light on what exactly motivates analysts — and how important being right is.
It found that, of nine factors, the number one factor that determined analyst compensation was the analyst’s industry knowledge. The actual profitability of their recommendations and the “accuracy and timeliness” of their earnings forecasts were dead last, bringing up the eighth and ninth spots.
It’s in this light that I’d like you to think about Buckingham’s “buy” call on SHAK stock. As a matter of fact, you should just keep those survey results in mind every time you read about some new analyst rating.
Anyways, there are a few metrics you might want to take notice of regarding Shake Shack stock that indicate it won’t be getting to $45 anytime soon.
Nobody will deny that the New York-based burger joint is growing — sales are projected to grow nearly 32% this year — but the price that investors must pay for that growth is simply unacceptable.
SHAK stock trades at 107 times earnings, 66 times forward earnings, 6.7 times book and at a 3.4 PEG ratio. The traditional metrics are screaming that this stock is overvalued. With a profit margin barely scraping the 2.5% level, why is Shake Shack trading like a cloud computing company?
To get to $45 anytime soon, these metrics would likely become more unattractive, or at least remain dramatically elevated. There’s simply no fundamental reason this company should trade at $45/share — or $35/share, if we’re keeping it 100.
I’ve been right on this stock before. On May 22, 2015, I literally called the peak of SHAK stock, calling it the most overvalued stock in the market and lamenting the fact that investors were unable to short it or buy put options on SHAK at the time.
That day, SHAK reached its all-time high of $96.75 per share. It’s down 63% since then.
Today, Shake Shack shares are both optionable and shortable. There’s not quite the profit opportunity there would’ve been last May, but I think there’s at least 20% downside from here, conservatively speaking.
While betting against a stock is often a risky proposition and not in the best interests of individual investors (sometimes the wisest action is taking no action), I hope that at least you will recognize that today’s “buy” rating from Buckingham Research is something that should be promptly ignored rather than acted upon.
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 firstname.lastname@example.org.