Restaurant chain Shake Shack (NYSE:SHAK) is a throwback style restaurant that serves hamburgers, hot, dogs, french fries and milkshakes. The company is headquartered in New York and at the end of 2017, there were 159 Shake Shacks around the world. The menu is rather simple, but it has allowed the company to grow at a phenomenal pace. And that’s part of why many investors have been paying attention to SHAK stock over the past few years.
From 2014 through 2017, Shake Shack’s gross profit grew from $44.5 million to over $140 million. Over the last three years, earnings have grown at a rate of 131% per year. In the most recent quarter, earnings grew by 45% on a year-over-year basis.
Sales have grown at an average rate of 38% per year, over the last three years and they grew by 27% in the most recent quarter. Analysts expect sales to grow by 26.2% for 2018 as a whole.
The company’s profitability measurements aren’t great, but they are decent. The return on equity is 13.1%, while the profit margin and the operating margin are both at 9.5%.
The Sentiment Toward SHAK Stock Is Very Pessimistic
One of the things that jumped out at me most about Shake Shack was the sentiment toward the stock. I look at three indicators in particular to get a read on the sentiment — the short interest ratio, analysts’ ratings and the put/call ratio. In the case of SHAK, all three of these indicators reflect pessimism toward the stock.
The short interest ratio is at 8.93. I tend to view anything above 5.0 as high, so seeing a stock that has performed as well as Shake Shack stock with a ratio at 8.93 is a great sign from a contrarian perspective. If the stock continues to climb and the short sellers have to buy shares to close their positions, this adds buying pressure to an already rising stock.
Looking at the analysts’ ratings, there are 11 analysts following SHAK stock, but only four of them rate the stock as a “buy”. Five rate SHAK stock as a “hold” and two rate it as a “sell.” Because there are so few analysts following the stock, this leaves room for additional coverage. There is also room for upgrades because there are so few “buy” ratings.
Finally, the put/call ratio for Shake Shack stock is currently at 0.86. This isn’t tremendously high, but it is high for a stock that is up over 90% in the past year. I normally consider a put/call ratio over 1 as high, but the stock’s performance needs to be taken in to account as well.
Shake Shack Stock Is Up Over 90% in the Past Year
Shake Shack went public at the beginning of 2015 and immediately jumped to a high of $96.75. After that initial move, stock in SHAK slipped down to the $30 range. From the beginning of 2016 through fourth quarter of 2017, the stock traded between $30 and $40 … with the exception of a few brief periods.
Shake Shack stock broke above $40 in December 2017, then dipped back below the $40 level in February 2018. However, the stock found support at its 52-week moving average. SHAK rallied sharply after bouncing off the support and flirted with the $70 level for a few months, but then it slipped down to the $55 level in January.
After the big drop, SHAK stock consolidated for several weeks, and just last week it seems to have broken out of the consolidation range.
The overbought/oversold indicators were at their lowest levels since February before they turned higher last week. The weekly stochastic readings reached the oversold level for only the fourth time since the beginning of 2017. They just made a bullish crossover and this has been a good sign for the stock in the three previous instances.
Between the strong fundamentals, the bearish sentiment and the technical picture, I am very bullish on Shake Shack stock. I can see the stock rallying over the next nine months to a year and perhaps challenging the $96.75 high from 2015.
As of this writing, Rick Pendergraft did not hold a position in any of the aforementioned securities.
