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Starbucks CEO Howard Schultz recently noted during a WYNC interview that Shake Shack Inc. (NYSE: SHAK) is "quite something," and millions of investors are wondering if they should buy shares as a result.
Not until you can answer one very important question, anyway.
And even then…
Howard Schultz Is Not Warren Buffett
Howard Shultz is no stranger when it comes to being the underdog.
He's turned Starbucks Corp. (NYSE: SBUX) from the one-room grinding shop in Seattle that I remember from high-school into a global coffee monster with a $78 billion market capitalization and annual revenue of $20.5 billion.
And he's made plenty of people millionaires along the way.
Starbucks stock has returned 2,426% since its IPO in 1992. That's enough to turn every $10,000 into $252,600 today. It's the stuff dreams are made of.
Millions of investors are trying to figure out whether Howard Shultz was just being kind or whether he was trying to impart true wisdom when it comes to Shake Shack… as in, "you should go out and buy shares" wisdom.
Howard Schultz saying he likes Shake Shack is a lot like Warren Buffett saying he likes Coca-Cola… only Schultz does not own Shake Shack, to my knowledge. Buffett owns $160 million worth of Coke stock.
More to the point, what Schultz actually said was that he respects Shake Shack as a competitor because the company is trying to get big, yet stay small… exactly as Starbucks is doing.
The other thing to think about is that Shake Shack still has under 100 locations at a time when Starbucks has more than 24,000 around the world. The former is still built around hype while the latter has become a global tour de force synonymous with innovation, social justice and, yes, profits.
I'd also point out to would-be SHAK investors that, according to SEC filings, Shake Shack CEO Randy Garutti just unloaded 8,000 shares on Sept. 23 in a transaction valued at $258,240. As I have pointed out many times, there could be any number of reasons why he's sold, ranging from simply wanting to raise cash, to paying for a child's education – but still – he sold, not bought. And that's worth noting, just as it was when Schultz, for example, sold $4.5 million worth of Starbucks shares last November.
At the same time, a number of analysts have slapped neutral ratings on SHAK, including JPMorgan Chase and Jefferies Group. Others, like Wedbush Securities and Vetr Inc., have simply rated it a "Sell."
I've made no bones about my views on Shake Shack.
Among other things, I called it insanely overvalued in May 2015, when the company sported a price/earnings (PE) ratio of 1,285, making it roughly 83 times more expensive than the average stock on the S&P 500.
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.