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Shake Shack (SHAK) began trading this morning, priced at $21 a share, opened at $47 and at its peak traded up more than 150%. So, is it time to short the Shack?
There are few, if any, who can complain about the quality of the fast-casual burger chain, proven by patrons more than willing to put up with an hour long line looking to get a taste at the Madison Square Park location. But is the stock simply an over hyped fan favorite and therefore over valued? CNBC's "Restaurant Startup" chef and restaurateur, Tim Love explained on The Halftime Report that the shack was a "sexy investment" right now and "there is a lot of hype behind it'. Love said there's more room to run into the mid-50's, but that eventually the stock should fall into the $20-30 range.
At these levels, Shake Shack is currently trading at 11-12x revenue versus Chipotle, an analyst favorite, which trades at 3-4x. Shake Shack cleared $82 million in sales from 40 stores and translated that into $6 million in profit or about $150k of profit per store in 2013. At the current valuation investors are paying about $25 million per store, or a 0.6% ROI.
"Shake Shack shares are selling at a massive premium", William Preston, Research analyst for Renaissance Capital's IPO ETF told CNBC but added, "When looking to short shares so close to an IPO, the cost of borrowing those shares becomes extremely prohibitive, with such a low float."
While investors may not be shorting this name due to the low availability of shares to borrow, this valuation is bound to come under some scrutiny in the coming months.
You decide: is it time to short the Shack?