Shake Shack (SHAK) has tumbled roughly 15% over the past two days despite pretty good fourth-quarter numbers -- a classic case of the disconnect that often occurs between a stock's price and its valuation.
The popular burger chain beat consensus estimates Monday for both earnings and revenues, while same-store sales and year-over-year sales growth were through the roof. That's a testament to SHAK's growing popularity among consumers, with tales of long lines at Shake Shack locations only adding fuel to the fire.
So why has SHAK tumbled to around $36 so far today after closing at $42.23 on Monday before the results came out?
I believe the stock is suffering from the fact that many investors apparently priced absolute perfection into Shake Shack's shares. SHAK certainly has a great "story," but Wall Street often bids great stories up too high when investors become overly enamored with a stock.
Is SHAK's story worth $40 a share, $20 a share or some other level? Less than a year ago, the market briefly thought the chain was worth more than $90 a share as "Shake Shack Mania" swept Wall Street.
The stock fell to $50 two months later, then rebounded above $70 the following month. But today, SHAK is some 20% below where the shares closed on their first day of trading following Shake Shack's January 2015 initial public offering.
Market watchers have attributed the stock's drubbing to management issuing 2016 same-store guidance in the 2.5% to 3% range on Monday. That's well below 2015's 13.3% gains.
I believe that's a big part of Shake Shack's sell-off, but I also think investors had expected SHAK to crush fourth-quarter estimates. Merely beating analysts' 8-cent-per-share earnings prediction by a penny or $50.3 million revenue forecasts by $800,000 wasn't good enough. Surely, the long lines and the Shake Shack Mania should have produced even better results than that, right?
That's the problem with pricing a stock for perfection. Even the smallest disappointment or tiniest hint that a firm's meteoric growth can't continue forever can send investors running for the exits.
The question now is whether Shake Shack is worth its current valuation of roughly 75x consensus 2017 earnings estimates. It isn't to me -- there's just too little safety margin (if any) at such levels. I think Shake Shack can certainly become a major force in the upscale-fast-food market, but the stock has simply gotten way ahead of its story.
That's been a common problem for recent restaurant IPOs. Shake Shack's experience is obviously a standout, but Noodles (NDLS), Potbelly (PBPB), El Pollo Loco (LOCO) are just a few examples of restaurant stocks that have stumbled since going public.
The Bottom Line
Shake Shack's experience shows that a great company and a great story don't necessarily translate into a great stock.
Ultimately, price and valuation do have a connection -- even if it's often temporarily lost when investors' emotions take over and their expectations get too high.