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Thursday, December 12, 2019

Why is Shake Shack (SHAK) Stock Down?

Why is Shake Shack (SHAK) stock going down?

December 12, 2019 - Shares of Shake Shack (SHAK) have dropped from $105 to $57 since September 2019.  I will explain why this happened and what the future holds for SHAK stock in 2020 and beyond.

- SHAK was priced for perfection above $100
- Uncertainty around the GrubHub partnership
- Uncertainty about renovating several restaurants in 2020
- Growth stocks have been selling off
- Uncertainty about the rising price of beef and paper packaging

The first reason Shake Shack (NYSE:SHAK) stock has been dropping is the fact that shares were overpriced.  When the company reported same shack sales of 3.6% and strong earnings in August, investors thought this momentum would continue, driving the share price up above $100.  Fast forward to November, the company reported solid earnings but not blow out.   SHAK stock fell back to $70 and continued to decline, recently falling into the $50's where it is now a super strong buy.

Secondly, management started hinting over the summer that they were studying the different delivery companies and have now decided to make GrubHub (GRUB) the exclusive delivery service.  This change has started to roll out and could provide sales volatility into 2020 as they phase out the other services like Postmates, Door Dash, Caviar, ect.  GrubHub is the best partner because they can obtain customer data and Shake Shack decided they are the best at delivering the food to customers correctly and on time.  The key to food delivery is having a delivery person ready to pick up the food as soon as it is ready.  Wall St. hates uncertainty and this sales uncertainty should be cleared up by June/July.  Shake Shack has already reflected this change in guidance so I'm not worried.

Third, Shake Shack has seen massive sales growth from food delivery.  Five years ago, there was only one way for me to purchase a Double Smoke Shack.  I would walk into the restaurant, order the burger, and wait for my food to be ready.  Now, I can order it from the app or GrubHub.  Digital is the biggest innovation fast food restaurants have seen since the drive thru.  Shake Shack restaurants are extremely busy, especially during peak times.  A revamp of some older locations is needed.

The company decided earlier this year that they would close several restaurants in 2020 for renovations.  The goal is to fix them so they are more efficient in this new digital age where customers are picking up just as much as dining in the restaurant.  These renovations will fuel growth and position older restaurants for future growth.  In the newer restaurants, Shake Shack has very few cash registers.  Here is what the future looks for Shake Shack;  less cash registers, more touchscreens for ordering!

Lastly, growth stocks have been out of favor as investors move into value stocks right now.  This is just a cycle that will revert back in due time.  Rising beef prices are cause for concern but this should level out in 2020.  Also, delivery and digital orders made for pick up both require more paper packaging which increases costs.  Shake Shack has a strong brand and with that comes pricing power.  If costs continue to rise, they can easily offset this by raising prices.  Most consumers love the food so they won't even notice.  I know I won't mind!

In conclusion, SHAK stock has taken a huge hit lately but shares are now a strong buy and that is exactly what I've been doing.  Two years ago I sold Shake Shack (SHAK) and bought Tesla (TSLA) but recently switched back.  I have been buying SHAK stock since early November and this is now the largest holding in my portfolio.  Shake Shack has an amazing brand, draws big lines, and management is positioning the company for massive growth both domestically and internationally.  SHAK could easily be a $300 stock in 10 years but I'm expecting shares to rebound back to $100 in a year or two.  I will continue to buy throughout 2020 as long as shares remain below $65.

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