Trading Nation

You could lose a 'tremendous amount' in this stock

Trouble ahead for Shake Shack?

Shake Shack has been a Street favorite since its IPO, its shares gaining more than 46 percent over the last six months. But according to one trader, the stock's meteoric rise spells trouble for investors.

"People are going to lose a tremendous amount of money here," David Seaburg of Cowen and Co. said Monday on CNBC's "Trading Nation." "It's a burger-and-fries company, and it's trading like a tech stock from the 1990s."

He recommends selling Shake Shack because of its sky-high valuation and the company's inability to achieve its growth goals.

Seaburg said Shake Shack's valuation is "astronomical," with an almost 800 percent premium compared to its peers. According to FactSet, Shake Shack shares are trading at about 206 times forward earnings, compared to McDonald's at 20 times earnings, and Wendy's at 29 times earnings.

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"Every metric value you look at, this stock is completely overvalued, so if you own it, sell it," he said. "This is not a stock you want to trade, this is not for the faint of heart."

Seaburg said the company's shares are not worth the premium price, because Shake Shack structured its growth plan around same-store sales in New York, and the results could change for the fast-food restaurant as it attempts to expand into different markets.

"Any way you slice it, they're going to struggle here," he said. "They just can't grow into it, it doesn't make sense whatsoever."

Shake Shack shares were down more than 25 percent last week, falling for four straight days after the burger joint reported quarterly earnings, despite beating on earnings and revenue, and raising year guidance for 2015. The stock gained about 4 percent on Monday.

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While there are no bullish analysts out of eight that cover the stock according to FactSet, not all believe that Shake Shack's valuation is too high.

In a report from Thursday, Stifel's Paul Westra reiterated his belief that Shake Shack is a leader in modern-day, fast-food dining and hospitality, and that the stock is "fairly valued" given Stifel's perceived growth potential.

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