Where the Shake Shack Stock Price Is Headed in 2016

Shake Shack stock price    The Shake Shack stock price is up 2.4% in early trading today (Tuesday), but SHAK is still down 16.76% on the year.

It's a drop that we saw coming, even when SHAK stock was presented to investors as the darling of Wall Street...

Shake Shack stock has been heavily hyped since its IPO on Jan. 29. Early investors had what entrepreneur Mark Cuban calls FOMO (fear of missing out), and trading volume hit an incredible 16 million shares on its first day. That drove the Shake Shack stock price up 119% on its first day of trading alone.

But retail investors weren't the ones who banked huge gains that day...

You see, only banks and large investors had the ability to purchase Shake Shack stock at the $26 IPO price. Retail investors had to buy in at the inflated opening price of $47 when SHAK was first publicly traded.

Hype alone is what drove the Shake Shack Inc. (NYSE: SHAK) stock price up, and it's why Money Morning Chief Investment Strategist Keith Fitz-Gerald warned readers in July that the company had an inflated valuation that it could never live up to.

"What's happening with Shake Shack is a very serious warning that the markets have become frothy and that investors are chasing hot ideas rather than results," Fitz-Gerald explained back in July.

And the company's forward price/earnings (P/E) valuation, which is a measurement comparing current earnings to future earnings, shows just how overvalued SHAK stock is. Shake Shack's 100.1 forward P/E valuation is almost five times higher than McDonald's Corp.'s (NYSE: MCD) 21.9 P/E ratio.

Shake Shack also only has a market cap of $1.41 billion compared to McDonalds' market cap of $107.41 billion.

But the overinflated valuation is just one cause of concern for current SHAK shareholders.

You see, there is a much bigger reason why the Shake Shack stock price will continue to fall into 2016...

Why the Shake Shack Stock Price Will Continue to Plummet in 2016

The biggest reason retail investors shouldn't add Shake Shack stock to their portfolios is because those who were able to buy in at the IPO price are trying to dump their shares.

On Oct. 8, Shake Shack filed to have all of its 26.2 million Class B shares converted into Class A shares. Early investors were allowed to sell some of their SHAK shares after the first lock-up period ended in July, but this new conversion allowed institutional investors to sell their shares before the second lock-up period expired in mid-November.

These sellers include the founder of Shake Shack, Danny Meyer, as well as top shareholder Leonard Green.

Investors don't want to see institutional investors selling their shares because it's the type of move that indicates a lack of confidence in the brand. It's also an indication that Meyer and Green just want to make a quick profit.

"If these insiders believed the Shake Shack stock price was cheap and that the company had better days ahead, they'd be holding on or even buying more," Fitz-Gerald explained.

And steep competition may be one of the biggest reasons why these large shareholders are losing confidence...

In the world of "upscale burgers," Five Guys Burgers and Fries has carved out a loyal following since it first opened its doors in 1986. Larger burger suppliers like McDonald's and Wendys Co. (Nasdaq: WEN) are also offering new "premium burgers" to try to appeal to Shake Shack's market.

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Shake Shack also has challenges appealing to health-minded consumers and millennials who prefer Panera Bread Co. (Nasdaq: PNRA) or Starbucks Corp. (Nasdaq: SBUX).

The Bottom Line: The Shake Shack stock price skyrocketed because of hype surrounding its IPO. When investors look at the large marketplace competition, you can understand why even the founder is trying to sell all of his shares. The hype is over, and investors need to stay far away from SHAK stock in 2016.

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