By now it’s no secret what is ailing the stock market, and with the world on lockdown, it shouldn’t be a surprise. Unfortunately, restaurants are one industry particularly exposed to this disruption. And in particular, Shake Shack (NYSE:SHAK) stock is one that moves fast — even under normal conditions.
Now, with elevated volatility, SHAK stock is falling 70% from its highs fast.
From here I believe Shake Shack is a buy. This may sound like a perma-bull comment, but today I bring an unbiased analysis of the company’s fundamentals and technicals.
But with a trailing price-earnings ratio above 70, SHAK stock isn’t a value play. But with a history of solid growth, it’s important to gauge the company’s worth through its sales, not its profitability.
And from that perspective it’s cheap, because it only sells at 2.5 times revenues. This is in line with restaurant peer Chipotle (NYSE:CMG) and one-third that of McDonald’s (NYSE:MCD). Clearly, value is in the eye of the beholder.
Don’t Bet Against SHAK Stock
Fast-moving momentum stocks are not appropriate for all investors, but this doesn’t mean you should bet against them. Those that bet against Amazon (NASDAQ:AMZN) lost a lot of money.
SHAK stock has favorable long-term fundamentals. Once we get of lockdown, businesses will start to recover, including Shake Shack. Today, the U.S. House of Representatives is expected to vote on the biggest financial relief package of all time — $2 trillion is a lot of money to bet against.
The coronavirus from China is still spreading, but the panic will ease quickly once experts develop an effective vaccine. But there’s an even better reason to bet on SHAK stock here — its technicals. It is comforting to know that Shake Shack has fallen into a well-consolidated support zone that dates back to its public debut.
Start Nibbling on Shake Shack Stock
SHAK stock is a bargain anywhere near $38 per share. As equities try to establish a bottom, it is not too late to start building positions. But because we still have elevated levels of volatility, it is important to be cautious.
On the way up, Shake Shack will encounter resistance through $52 per share. The onus is on the bulls to overcome every level that served as a ledge on the way down. The biggest target for bulls is $72. While this would be extremely tough, it reflects 40% of upside from the current share price.
There is no one-size-fits-all setup for investors, but the homework is always the same. Avoid making the obvious mistake of chasing shares blindly. That’s why I reviewed Shake Shack’s fundamentals and technicals, and now I can conclude that going long here is not an obvious mistake.
Macroeconomic Help Through These Tough Times
It is also important to mention that the broader economy will influence SHAK stock. Yesterday we learned that approximately 3.3 million Americans filed for jobless claims last week. And this number — and other economic reports — are likely to get uglier.
Wall Street has priced in a lot of this ugliness, but investors could panic once again. My thesis is that we have seen the worst of this correct. The S&P 500 could dip a little deeper, but not by much.
Moreover, we have political reasons to be optimistic for the stock market. We are heading into an election season, and I am confident the White House will do everything it can to prop up the economy. The proposed $2 trillion stimulus is big enough to create market-carrying momentum that could take us back to all-time highs.
Yes, there will be hiccups along the way, but investors will be able to buy the dips in an ascending trend. After a couple of quarters of negative GDP, the recession could quickly end.
I cannot end this note without extending my sincerest sympathies to those suffering from the virus. My thoughts remain with you.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
