Shake Shack: SHAK

Generally I like to do things in 3 tranches so here’s the plan:

Entry #1 Small:

<82 1st tranche $81.79 was todays closing price so consider the trade active.

Entry #2: A little bigger.

At $75 or under on an earnings disappointment.

ENTRY #3 for full position:

<$65 on higher than normal volume but much less than yesterdays. What we want to see is a down open followed by vicious short covering and a reversal to positive closing at the high end of the days range. That’s what I’m looking for next. I want to be aggressive here between $60-65 for a trade. Tranche #1 is small, tranche #2 is bigger and tranche #3 even bigger so my average cost is at the lower end of the traded range.

After hours 11/5, SHAK is trading $71, this is the opportunity to add to the position or initiate a position tomorrow. Lets see how we open, we should expect to see a little follow-through selling but that’s just a general rule.

Why is SHAK falling?

SSS missed and the issues are higher food costs, labor costs reducing margins but demand and store growth is on schedule. The have pricing power or at least pricing stability IMO and they need to address issues using technology to reduce the labor costs, enhance margins, etc. Buy this dip. They have significantly more headroom for higher store counts once they update that guidance. The break-out level was about $69.5 so if we see under $70 tranche #2 will be active.

The stock ended the day with full capitulation with 12x normal volume - this is the classic definition of capitulation: downgrades, growth investors & hedge funds leaving without price sensitivity, sentiment getting washed out and shorts now having a strong windfall to consider covering into. The capitulation could take a few days of selling like GRUB stock but this is where I think it will pay to start building a bigger position. Just my opinion, do your own work catching falling knives.

SHAK: Here’s my full report on the business and long-term opportunity Shake Shack opinion

They called me a knife-catcher in the trading room back when I did this for a living, I don’t mind buying my favorite stocks when they are on sale. I also am not so arrogant to believe that I will get the exact bottom or top in a trade idea so I like to nibble on my first tranche sometimes and wait for the market to tell me I’m right, then I can add on strength. When you are catching falling knives, this is the strategy that’s worked best for me.

The stock went vertical and peaked on 9/20/19 at $104 and has seen a low volume sell-off back towards the break-out level of $70-$76. There was no upside capitulation volume at the peak and I like the low volume pullback even if it never feels good. On a daily basis, the stock has never been this oversold offering a decent first tranche entry. Understanding the stock could see the $70-$76 level (the weekly chart that was super overbought is now back to under 50 which often is as oversold as strong stocks get from RSI perspective). I’m not inclined to go all-in on this trade entry here around $81.79 but would get much more aggressive towards the $76 level. So dip the toes in the water and watch for a day when we open down and close green on decent volume. Earnings are on November 4 I believe.

The business:

Most restaurant stocks were very strong for the last 12 months and now there’s concern about tough comps(warranted) and rising input costs(also warranted). So pricing power is important and store growth and brand love is vitally important. Shake Shack has all of these and will continue to utilize technology via Kiosks and app ordering to drive efficient store economics.

My favorite fast casual restaurant. Period. Created by a chef Danny Meyer of Union Square Hospitality Group which owns some serious restaurants in NYC, and focused on design and aesthetics differentiation, SHAK has a cult-like following akin to the burger joint called In-n-out. They have upscale stores that become core staples of a community to more typical burger joint to having significant licensing opportunities with partners to build stores around the world. Each part of the SHAK flywheel requires different financial obligations and holds different margin and revenue assumptions. All in all though, this model can be scaled globally and the store count at minimum will double from here. I believe management will continue to raise the store count goal as the fruits of the model continue to build momentum.