Whoever Shake Shack's (SHAK) investors are, they are being blinded by greed.
This is one of the most volatile stocks in the entire market, and the daily swings in Shake Shack are not being fueled by broke 35-year-olds who ate at the chain once and love the hormone-free burger meat. Instead, this is hot money, trying to boost a name by using the cheap leverage that may be getting a little bit more expensive thanks to Janet Yellen and her boys. Ugh, institutional investors can be so greedy sometimes.
But I suspect, amid the voracious daily swings in the stock, many retail investors have taken a bite out of the name (pardon the pun). Why not? They have no clue what they are up against -- sophisticated trading platforms and the ability to trade lightning-quick on rumors. The less-experienced only see explosive stock gains, as was promised in the daily newsletter. For the retail guys who saw 8% of their life savings wiped away on Wednesday, they now enter Thursday's session completely dismayed on the investing process (if they weren't already). Thank you, Shake Shack.
Nonetheless, whether a sophisticated investor or one at home reading stock charts in the basement, greed has set in on a burger chain that operates just north of 60 restaurants. And when that greed sets in, characterized by chasing a stock with no real news being issued by the company, beware. Here are several things I think investors are forgetting about the company.
Rent prices: Propelled by an influx of workers from the Internet economy and an impressive 17 consecutive quarters of rising prices, the average cost per square foot of office space in Midtown Manhattan South hit an all-time high of $62.02 in the first quarter, according to Colliers International. A Shake Shack restaurant isn't going to occupy an entire office floor in a 50-story building, but this is simply an example of surging rents in the company's home market and a taste of what's happening across the country in tourist destinations. Shake Shack's valuation doesn't account for the clear risk from lofty monthly rents that only seem to be getting loftier. Either the company will have to raise prices to satisfy Wall Street's hunger for juicy profits, which could alienate customers, or it will have to hold the line on prices and risk having a bite taken out of profits.
Both could lead to unsavory outcomes.
Delivery services: I am not too sure about the company's view on delivery -- I suspect it is not a big-time focus as execs enjoy working on the menu and employee culture. But over the past few months, the likes of Chipotle (CMG) and Starbucks (SBUX) have announced delivery services to tap into the on-demand economy. Pizza Hut, owned by Yum! Brands (YUM), is testing an ingenious new delivery service with an Uber-like tracking feature. Taco Bell, also operated by Yum! Brands, is gearing up to test a delivery service in Dallas, along with venturing into that arena on college campuses for Taco Bell. Yes, Burger King (BKW) delivers, too. I think the market is not appreciating the risk to Shake Shack's business from competing fast-food chains laying the groundwork for sizable pizza-delivery-like operations.
It's getting crowded out there: The market, in typical fashion, thinks it's very easy for a restaurant company to open a restaurant. In the past, it has been. Going forward, though, it won't be so easy-breezy as Chipotle, Yum! Brands, even struggling McDonald's (MCD) continue to gobble up prime real estate as if it was going out of style. Shake Shack has laid out a reasonable estimate for new restaurant locations over the next few years, but the market doesn't appreciate the competition it will face in those new markets and the possibility the sites are snatched up by better-capitalized entities.
All of that said, I'm a huge fan of Shake Shack's food and messaging. I see several opportunities for the company to exploit. They include:
1. High-end pet food market.
2. Entirely new brand; see "Chicken Shack" rumors.
3. Breakfast (testing currently at three locations -- serving time is limited and so are options).