We explored last week an opportunity in Shake Shack (SHAK) . Shares of the burger and shake chain took off on word that an activist investor had acquired 6.6% of the company.
This week, a different activist is focused on Yelp (YELP) . That stock is also rallying, but the circumstances surrounding Yelp are not similar.
Earlier this week, TCS Capital Management delivered an open letter to Yelp's board. TCS, which owns more than 4% of Yelp's shares, complained about the stock's "horrific" performance. The letter claims that Yelp has underperformed the S&P 500 by 98% over the past five years.
The letter went on to describe Yelp's CEO and co-founder, Jeremy Stoppelman, as "complacent" and an "obstacle." It also criticized the company's board, and bemoaned Yelp's "long history of poor execution."
A quick glance at the chart reveals the pain of Yelp shareholders. While market indexes have skyrocketed, Yelp shares have been trapped in a consolidation pattern for five years (black dotted lines).
Worse, the pattern of lower highs (LH) and higher lows (HL), known as a symmetrical triangle, is neither bullish nor bearish. Even news of the involvement of TCS has failed to move the stock beyond the boundaries of this pattern.
Chart by TradeStation
The letter insinuated that the CEO and board are only interested in what it described as "unconscionable compensation packages." TCS believes that with proper management, Yelp should trade at $70.
Even if every TCS claim is true, that doesn't necessarily mean investors should buy. To understand why, let's compare Yelp to another company that activist investors are pursuing, Shake Shack.
Shake Shack provides an outstanding product, but is increasing its footprint at a very slow pace. There are only 262 Shake Shacks in the U.S. Compare that to McDonald's (MCD) , which has over 270 stores in the greater Philadelphia area alone.
Shake Shack has a ton of potential. If ownership could figure out a way to expand quickly while maintaining quality, perhaps via franchise offerings, the company could see an explosion of revenue.
There is a clear path for Shake Shack that could lead to victory. Can we say the same of Yelp? It's possible, but it won't be easy, and it won't happen quickly.
While TCS may have a valid argument, the issues with Yelp's CEO and board aren't new. TCS isn't the only entity that sees potential in Yelp, but to date, no bids for the company have materialized.
Also, TCS claims that it may make its own bid for Yelp. If TCS is serious, why would it reveal its intentions? This is akin to a poker player revealing his hand.
Bottom line: I'm not a buyer of Yelp right now. All I see is a frustrated shareholder trying to improve a regretful position. Valid concerns aside, there are better stocks to own.
