Editor's Note: Please note that we are adding Shake Shack to Investing Ideas today as a short. A brief explanation follows below from Hedgeye CEO Keith McCullough.
I'm looking for the most overbought name on our Best Ideas SELL list - and tag, Shake Shack, you're it.
Yes, I realize you can't yet short the stock. But if you are long it, you can sell some - and our job, as Risk Managers, is to help you gain a better understanding of company risks inasmuch as anything else - simply because Old Wall doesn't.
On the Howard Penney bear case for the SHAK:
Based on the guidance management provided, we believe they are either 1) being less than genuine or 2) don’t know the tone of the business going forward.
The most visible place of uncertainty is in same-store sales guidance. In the model for the balance of 2015, we are assuming +6% price and +2% mix good for 8% same-store sales growth over the balance of the year. This would result in 2015 same-store sales in the high single digit range versus guidance of low-to-mid single digits. Baked into management’s assumptions is significant cannibalization from the reopening of the flagship store in NYC.
While the 1Q15 earnings release was very strong the valuation the market is awarding SHAK is mindboggling! If we model out $40 million in EBITDA in 2016 (which is nearly double the current street estimate of $22 million) and put 30x on it the stock is worth $32 or 52% down side. If we value the company closer to CMG the downside approaches 75% from current levels.