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McDonald’s and double that of Chipotle. Those metrics conclude that each Shake Shack location is worth roughly $50 million as of last September. That’s illogical considering how little the company has grown during its seven months on the market.
“If the Shack is going to achieve a McDonald’s-like valuation per location, the company would have to open approximately 864 restaurants representing a 929% expansion from the 84 locations they operate today,” Fitz-Gerald explained.
The burger chain’s artificial valuation is a perfect example of investors’ tendency to buy shares based on hype rather than financial data.
But hype can only last so long, which is why Fitz-Gerald considers Shake Shack stock one of the best short candidates of 2016. In fact, investors who followed Fitz-Gerald’s recommendation to “short the Shack” last May are enjoying a 44% return.
“The deal breaker for Shake Shack – at least in my book anyway – is that it’s always carried an insanely high and unjustifiable valuation,” Fitz-Gerald said last November. “As much as I love the food, I think Shake Shack stock still has more room to the downside.”
The Bottom Line: Shake Shack stock had a superb year in 2015. Thanks to frothy hype and strong earnings reports, SHAK stock soared to a nearly 90% gain last year. But the company is insanely overvalued right now. With absurdly high PEG and P/E ratios compared to its more seasoned competitors, we recommend shorting Shake Shack stock in 2016. Shares will see a drop-off this year as the hype runs out of steam and investors see the company for what it really is.
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