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Shake Shack Stock Is One to Short in 2016 for This Huge Reason

This is a syndicated repost published with the permission of Money Morning - We Make Investing Profitable. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

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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