By now, even my mom knows that Shake Shack went public on Friday and more than doubled its initial offering price on the first day of trading. When she called me on Sunday, she asked if I had bought the stock. I said no. My mom has never had one of their burgers, but I told her they're good — really good. Then why not buy the stock?, she asked. There are a number of reasons.
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A Shake Shack restaurant in Chicago.
I have a little bit of experience in the burger-investing space. During my years of working on Wall Street at various hedge funds, I invested $1 million in Fatburger and owned the rights to the chain for the state of New Jersey. It started off as a west coast casual-dining franchise that claims the biggest, juiciest hamburgers anyone has ever seen along with an old school jukebox-type feel to the place that gives it some atmosphere. The concept is great and the food is delicious. The investment didn't quite work out: My first mistake was overvaluing the company from the beginning. Then, along with everyone else in the financial collapse, we got hit with rising food cost fuel costs and rent. It wasn't sustainable with a lagging economy. And we ultimately picked a couple of bad locations that set us back.
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Shake Shack is getting a lot of hype now but here are four reasons why I think it's not a "buy" right now:
Valuation. Shake Shack has demonstrated remarkable growth thus far, but its decreasing margins and current stock price do not support owning shares at these levels.
Growth. At these prices, the stock is already assuming multiple years of growth already priced in. If you are buying the stock today, you are buying it for 2020 year earnings when the multiple compresses. I can find better places for my money.
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Competition. People are making the comparison to Chipotle, the fast-casual fresh Mexican food chain, but that's looking at it all wrong. Sure, they are in the same sector but what they offer is completely different. When you crave that kind of food, your options are limited to Taco Bell or an old-fashioned sit-down dinner with menus and wait staff. It's the only game in town. They also benefit from demand for a more health-conscious society. SHAK is part of a highly crowded burger-and-fries universe.
Cool factor. I'm always hesitant when a company goes public and there's a certain cool factor to owning the stock. In my opinion, most of the buyers have not done their homework. Analyst and investors have been trying to put a valuation on COOL forever, but have yet to do it successfully. We have no idea if this is the Facebook or MySpace of burgers yet. Because they key to analyzing cool is longevity. When you figure out that formula give me a call—we should talk.
This is not to say that Shake Shack will never be a buy. I actually think the chain will do quite well. But there are hurdles to climb and growing pains to come over the next few years, especially if investors are expecting the type of growth that the current stock price indicates. Not every location is going to be a winner—there will be some losers along the way. (Trust me on this.) The cost of food will have a direct effect to margins. Even fuel will play a role into realizing profits. This isn't as easy as flipping burgers.
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SHAK is a sell. Maybe I'll be wrong, but I'm okay missing this trade. But I'll be first in line to order a cheeseburger next time I'm in Tribeca.
Commentary by Turney Duff, a former trader at the hedge fund Galleon Group. Duff chronicled the spectacular rise and fall of his career on Wall Street in the book, "The Buy Side," and is currently working on his second book, a Wall Street novel. He is also featured on the CNBC show, "The Filthy Rich Guide." Follow him on Twitter @turneyduff.
