Dear Mr. Berko: I was considering opening a Shake Shack unit. So I visited several Shake Shack locations in Philadelphia and NYC and those were good experiences. But at age 66, I decided that operating a unit would be too much for me. So last May, because I was convinced that Shake Shack was going to be another Chipotle Mexican Grill, I sold three of the mutual funds in my IRA to buy 1,000 shares at $92. And almost immediately after I bought the stock it began to go down and hasn’t stopped. During the last quarter, the company reported that sales at restaurants that have been open two years grew 17.1 percent over the year before. Combined sales for all locations grew by 67 percent and earnings increased five times, which was much higher than analysts expected. But the stock still went down in price. Why is this great company going down in price when everything looks so good? I’ve lost almost $60,000 on the stock, which is about 15 percent of my once $408,000 IRA that has declined to $348,000 this week. And at my age, it’s impossible to make it back. Please tell me what to do: Hold, buy more or sell? Also help me with your good advice, which I need before I tell my wife about this.
— J.S., Erie, Pa.
Dear J.S.: Shake Shack (SHAK-$35.20) was one of the many successful restaurant IPOs in public at $21 in January 2015. And by May, the bumbleheads and dunderheads, dimwits and halfwits were led down the primrose path by SHAK’s market makers as the shares zoomed to $96. That day a record number of SHAK shares were traded and the market makers at JPMorgan Chase and Morgan Stanley giggled all the way to the bank. With 78 units selling hamburgers and French fries, this company has come a long way since 2001 when it ran a hot dog stand in NYC. But cheese and crackers got all muddy, SHAK is just another new, casual, greasy spoon, selling hamburgers and French fries loaded with calories to increasingly obese Americans and their fat kids at inflated prices. This stock ain’t even worth $35 a share. And its $1.8 billion capitalization exceeds that of Del Monte, Nutrisystems or Tootsie Roll. Frankly, with zero earnings, SHAK, like Elon Musk’s Tesla, is a testament to the cupidity and naivety of American investors. Take your wife out to dinner at a very special restaurant that she adores, select a wine she’s crazy about, and don’t waste a drop. After several drinks, and immediately after the waiter presents the main course, take your wife’s hands and spill the beans. If you’re very lucky, she’ll just thrust the butter knife through the back of your hand, toss the lobster Newburg in your face, scream till she’s hoarse, and won’t do your laundry for six months. If you’re not lucky, she won’t say a word. When you get home, she’ll burn your toupees, set fire to the house, take the dog, your Taylor Swift recordings and the keys your classic ’57 Chevy and file for divorce. You may want to drop Ann Landers a note. She’s much better at marriage advice than I.
This year, SHAK expects 2016 earnings of 35 cents a share. Those numbers stink. I can’t imagine, after this volatile market route, that there are still investors dumb enough to pay 100-time earnings for a bean wagon food stock. I suggest that you sell your shares before you losses become even bigger. SHAK may continue to grow quickly, but I suspect it’ll be short-lived. SHAK will grow, not because its food is good and its ambiance is attractive but rather because it seems to have a cult following among the millennials, those born between 1980s and 2000. These are the same idiots who bought Crocs (plastic footwear) at $90 a share in the summer 2007 that now trades at $9. People’s values and expectations always change until something different comes along.
Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or mjberko@yahoo.com.
