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Hedgeye's Howard Penney Reiterates His Shake Shack Short Call | $SHAK

Takeaway: SHAK shares still have significant downside ahead.

Hedgeye's Howard Penney Reiterates His Shake Shack Short Call | $SHAK - burger

 

For the record, veteran Hedgeye Restaurants analyst Howard Penney has been bearish on Shake Shack (SHAK) since it went public in February.  In a "mince-no-words" moment back in May, he wrote:

 

“The Shake Shack charade is over. And I mean over and done. It’s just a matter of time.”

 

Back when those prescient words succinctly outlined our short call six months ago, shares of the burger chain were approaching what would ultimately be their all-time high. Since then, SHAK is down 35% and off 51% from its May high.

 

Here’s the chart. It's not pretty:

 

Hedgeye's Howard Penney Reiterates His Shake Shack Short Call | $SHAK - shak chart 2

 

Penney has maintained his short call on SHAK since originally penning his thoughts back in March. Here are a few interesting excerpts from his March research note:

 

“For the most part, the SHAK growth story (business model) is predicated on the view that what works well in NYC will work well in the rest of the world… The bull case for the stock centers on the brand’s unique beginnings and its “cult-like” status, which sets it apart from other better-burger operators… We’ve seen many “cult-like” companies come and go and the vast majority of these stories have ended poorly.”

 

In other words, the company management has extrapolated its initial success in New York City to a growing base of locations in other cities. But outside Manhattan, Penney continues, its average restaurant generates significantly slimmer margins because the brand awareness isn’t as strong.

 

“The SHAK bears, such as us, argue that new units in dispersed markets typically experience lower average unit volumes and opening-related inefficiencies, such as higher labor costs. In addition, we question whether or not there has been enough investment in G&A to have the necessary resources to work through these inefficiencies by the second or third month.

 

The bottom line is that, for us, there is a very good probability that SHAK begins opening up some new units that fall short of the Street’s expectations.”

 

Here's Penney and analyst Shayne Laidlaw in their most recent SHAK research note:

 

"... Instead of taking the conservative approach of building out its new units with a geographic concentration that allows for SHAK to maintain economies of scale and building brand awareness, management has gone the route that has been the death of nearly every concept that has tried."

 

Bottom line? We haven't changed our thinking on the stock. Penney sees 40% downside from here.

 

Look out below.


NUS: Adding Nu Skin to Investing Ideas (Short Side)

Takeaway: We are adding Nu Skin (NUS) to Investing Ideas.

Editor's Note: Hedgeye Managing Director Howard Penney will send subscribers a full research report next week explaining our bearish thesis on the stock. In the meantime, below is a note written by CEO Keith McCullough.

NUS: Adding Nu Skin to Investing Ideas (Short Side) - nuskin

 

"... Nu Skin recently released detailed information surrounding VitaMeal sales and profitability. The new information they provided conflicted with the information they gave shareholders on the 3Q15 earnings call. 

 

Clearly, by putting out this new information, management is trying to calm the skeptics about the issues surrounding VitaMeal. Unfortunately, the new information sheet provided by the company only raised more questions about VitaMeal than it answered. 

 

Now one of the biggest concerns we see coming out of this new information is where did all the money go?  Which is arguably a bigger issue than we saw rising out of the VitaMeal controversy originally. Now, the original concerns are still there, they are just further compounded by this additional question.

 

Howard Penney reiterates the SELL call, on green.

KM"


[UNLOCKED] Keith's Daily Trading Ranges

Editor's Note: We've made some enhancements to Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough.

 

Subscribers now receive risk ranges for 20 tickers each day -  the last five are determined by what's flashing on Keith's radar screen and what tickers subscribers are asking about. Click here to subscribe.

 

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.29 2.18 2.23
SPX
S&P 500
2,025 2,109 2,088
RUT
Russell 2000
1,139 1,203 1,188
COMPQ
NASDAQ Composite
5,018 5,182 5,116
NIKK
Nikkei 225 Index
19,287 20,049 19,786
DAX
German DAX Composite
10,826 11,384 11,320
VIX
Volatility Index
13.92 20.11 15.19
DXY
U.S. Dollar Index
99.19 100.21 99.83
EURUSD
Euro
1.04 1.07 1.06
USDJPY
Japanese Yen
122.02 123.73 122.58
WTIC
Light Crude Oil Spot Price
40.18 43.64 43.20
NATGAS
Natural Gas Spot Price
2.21 2.39 2.29
GOLD
Gold Spot Price
1,060 1,080 1,070
COPPER
Copper Spot Price
1.98 2.16 2.04
AAPL
Apple Inc.
111 120 118
AMZN
Amazon.com Inc
635 688 675
PCLN
Priceline.com Inc.
1,213 1,312 1,240
VRX
Valeant Pharmaceuticals International, Inc.
66.61 95.40 87.45
DIS
Walt Disney Co.
115 122 118
MCD
McDonald's Corp.
110 115 113

 

 


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China, Oil, Yields

Client Talking Points

China

China got smoked for a -5.4% drop in Shanghai (-1.9% in Hong Kong) after reporting that Industrial Profits slowed to -4.6% y/y (vs. -0.1% prior) and that they have sketchy brokers – reminder: Chinese demand is not bouncing.

Oil

Black Friday sales in WTI and Gold, deflating another -1.7% and -0.7%, respectively – don’t forget that with the Fed hell bent on raising into a slow-down that USD Up (rates down this week) #Deflation Risk remains as obvious in late November as it was in late July.

Yields

That wasn’t a typo – rates are down -5bps this week on the 10yr to 2.21% and the Yield Spread continues to compress as every major #LateCycle consumer data point slows (see consumer confidence and personal consumption data for details); Swiss 10yr new lows at -0.39% this morning too.

Asset Allocation

CASH 68% US EQUITIES 3%
INTL EQUITIES 5% COMMODITIES 0%
FIXED INCOME 18% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
MCD

MCD is reducing G&A by $500 billion compared to the $300 million target announced in May the vast majority of which they expect to realize by the end of 2017.

 

Expectations going forward are for system sales to grow faster than G&A. The incremental savings are primarily derived from savings coming from a more heavily franchised and less G&A intensive structure; streamlining of corporate and former Area of the World organizations and realizing greater efficiencies through the global business services platform. The G&A savings represent roughly a 20% reduction off of the G&A 2015 base of $2.6 billion.

 

Another big shift is that MCD is now aiming to refranchise 4,000 restaurants by the end of 2018, with mostly all of them to take place in the high-growth and foundational segments.

RH

Below are two callouts from this Thursday's Willams-Sonoma (WSM) third quarter earnings print as it relates to Restoration Hardware (RH). RH will report earnings in early December.

 

West Elm – i.e. the only concept within the WSM family of brands that is growing square footage put up a 15.7% comp in the quarter which equated to a 40bps acceleration on a 2yr basis sequentially. The concept has always been a good bellwether for RH from a directional standpoint. The consumer/concept are much different. West Elm productivity is in the $800/sq.ft. range compared to RH at $3,300 (inclusive of e-comm) in the same size box. But it’s the only concept growing square footage. We are modeling a divergence in 3Q15 as RH pushed its growth into 2H from 1H with the release of two new concepts this Fall (Modern and Teen).

GM – was down 110bps in the quarter, with merch margins relatively flat offset by dilution from International franchise growth and increased shipping expense as WSM continues to iron out its inventory position from the West Coast port contract dispute. It's important to mention the contract dispute because it was resolved nine months ago (and yet the company still talks about it). On the shipping front, new rate hikes at FedEx and UPS haven’t hit the P&L, so this was all self-inflicted. Each of the negative drivers on the GM line appear to be unique to WSM and shouldn’t be contagious to a name like RH. 

TLT

The long bond position is taking some heat with the rate hike fears, but that’s why you’re short JNK on the other side of it. Deflation and increasing rate hike expectations are the nemesis of poor credit. As mentioned last week, it’s called spread risk, and this leverage is fueled by low rate policy.

 

Since the Fed turned hawkish, bonds are down, rates have risen, and deflation has re-commenced. Admittedly, long-term treasuries haven’t worked. TLT is down -2.0% over the last month; BUT, if you’ve followed us with our short JNK call, that’s down -3.4%.

Three for the Road

TWEET OF THE DAY

This has been one of the busiest weeks of US and Global economic data in Q3

@KeithMcCullough

QUOTE OF THE DAY

"To be the man, you have to beat the man!"

-Ric Flair

STAT OF THE DAY

Brett Farve threw for 71,838 yards during his NFL career.


November 27, 2015

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.29 2.18 2.23
SPX
S&P 500
2,025 2,109 2,088
RUT
Russell 2000
1,139 1,203 1,188
COMPQ
NASDAQ Composite
5,018 5,182 5,116
NIKK
Nikkei 225 Index
19,287 20,049 19,786
DAX
German DAX Composite
10,826 11,384 11,320
VIX
Volatility Index
13.92 20.11 15.19
DXY
U.S. Dollar Index
99.19 100.21 99.83
EURUSD
Euro
1.04 1.07 1.06
USDJPY
Japanese Yen
122.02 123.73 122.58
WTIC
Light Crude Oil Spot Price
40.18 43.64 43.20
NATGAS
Natural Gas Spot Price
2.21 2.39 2.29
GOLD
Gold Spot Price
1,060 1,080 1,070
COPPER
Copper Spot Price
1.98 2.16 2.04
AAPL
Apple Inc.
111 120 118
AMZN
Amazon.com Inc
635 688 675
PCLN
Priceline.com Inc.
1,213 1,312 1,240
VRX
Valeant Pharmaceuticals International, Inc.
66.61 95.40 87.45
DIS
Walt Disney Co.
115 122 118
MCD
McDonald's Corp.
110 115 113

 

 


CHART OF THE DAY: Wall Street Projections Are As Bad As The Fed's

 

CHART OF THE DAY: Wall Street Projections Are As Bad As The Fed's - 11.27.15 EL chart

 

Editor's Note: Below is a brief excerpt from today's Early Look written by Hedgeye's Director of Research Daryl Jones. Click here to subscribe.

 

"... Now we certainly give money managers credit for being savvier, as it relates to the markets, than most members of the Federal Reserve, but the Chart of the Day shows that their “projections” may be almost as inaccurate as the Fed. As the chart highlights, in September 2014, the last time investors were selling Treasuries at this rate, it was basically at the peak in 10-year yield. So the moral of the story is: only turkeys sell at the lows."


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