One restaurant company saw its stock enter the year with gusto, but will watch it conclude the year in a freefall.
Shares of better burger chain Shake Shack (SHAK) have plunged about 61% since reaching a 52-week high on May 22. That high was fueled by considerable euphoria among less prominent whales, and retail investors, over the chain's long-term prospects after a well received IPO in late January.
Since then, however, sentiment has reversed sharply in spite of stellar sales and earnings from Shake Shack.
The market has turned against the red-hot chain as a result of insiders filing to sell shares as they seek to cash in on their early winnings. There are fears of an avalanche of stock being dumped onto the market in the first half of 2016, signaling a loss of confidence in the chain's future.
There has been some insider selling. But I believe the move is more the result of investors seeking to diversify, than it is their making an indictment on the company's business model. Shake Shack declined to comment to me on the stock movement.
I wouldn't try to step in front of the selling at this moment -- the stock has lost about 8% in the past five sessions alone. But, I believe the time to wade into Shake Shack is fast approaching. That is simply because there is a growing difference between the company's future (which is very bright) and market forces. This is a high-growth company that is actually nicely profitable, and is expected to remain so for the foreseeable future. Twitter (TWTR) it is not. Now is the time to begin your due diligence on the company.
I was reminded of Shake Shack's bright future while standing in line for 30 minutes at a new location that opened recently by my house. Not only were people willing to stand in line for an extended duration when other nearby options existed, but they showed almost no hesitance to load up their orders.
The biggest burger offerings (double instead of a single patty) were ordered without regard to prices that reach over $8.00 after-tax. Burgers were ordered with cheese fries and a root beer float, not glasses of free water. One group of foreign- speaking folks I chatted with ordered every burger on the menu because they had heard of the chain overseas. Bottom line is Shake Shack is seeing customer responses that others in the business of fast food would only dream of having day in and day out.
Here are the basics behind my due diligence to serve as a guide.
Is the company growing as a high growth company in its home market? Absolutely, the company is doing it from two different angles.
First, Shake Shack will likely open more than 10 new locations in the U.S. in 2016. These are some of the most interesting and lucrative new sites I have seen targeted by a restaurant company.
While the company will open near competitors in higher-end outdoor mall settings, it also continues to open flagships in parks that promise strong crowds and the ability to use outdoor seating.
Second, the company's same-store sales remain strong. I believe the market has become a little concerned about the pace of sales growth having cooled to start the fourth quarter, That was the case with many restaurant companies. But if Darden (DRI) with its gross food could put up a decent quarter as it did last week, Shake Shack's sales are probably trending above where the market believes.
I believe the warm winter is helping the company, based on sites that have outdoor seating. Commodities prices also remain at bay, which is lucrative in light of the pressure the industry is seeing on hourly wages. I also expect more locations will receive the new breaded chicken sandwich in 2016 following strong customer response to tests this year. That should further support same-store sales.
Is the high growth company forging ahead with international store openings? Yes. Opening restaurants abroad for upstart concepts such as Shake Shack is a show of confidence in that concept. Shake Shack continues to excel in this area. Following what appears to be a successful opening recently in Japan, the company announced on Monday it will be opening in Seoul, South Korea in 2016.
The sites Shake Shack is choosing overseas are quite creative. They display the due diligence that suggest company executives have not lost enthusiasm for the concept's growth prospects. That's what the market is saying right now.
As a plus, I like how the company is tailoring its menu to local tastes on day one of the opening -- it helps endear the concept to the locals, and makes it a top place to visit when those locals travel to key tourist destinations in the U.S. McDonald's (MCD) could learn something from that practice.
Are executives losing love for the brand? It's hard for people on the outside to ascertain such a thing. I have sat down with the CEO and have fired emails to the company regularly. But one can never really be sure about the culture inside of a company. From what I can tell, however, there has been no discernible shift in the culture of the company to suggest the stock's plunge is justified due to some unforeseeable, negative major event.
Executives remain incredibly passionate about the brand and its future (freakishly so, I would say). That shows in how the new sites are selected, how the CEO still makes comments on new restaurant announcements and the tone of the team on earnings calls.
I believe this is an incredibly focused company, which will have that focus rewarded once again in 2016 with a higher stock price.
