Why Shake Shack Stock (NYSE: SHAK) Is Not a Buy

Don't believe the hype. As tasty as Shake Shack Inc. (NYSE: SHAK) burgers are, the headlines and valuations the establishment has received lately are way over the top. In fact, Shake Shack stock gained 8.4% on May 21 thanks primarily to a run of lofty, praising headlines.

But on Wednesday, May 28, the stock was down 24% from its May 22 high of $94.83, worrying investors that the self-proclaimed "modern-day roadside burger stand" is too volatile of an investment.

Money Morning Chief Investment Strategist Keith Fitz-Gerald is bearish on SHAK stock. He told CNBC's Erin Burnett on Tuesday, May 27 - when the stock was down 14% from May 22 - that "they make great burgers; it's a snazzy place to hang out; but that doesn't make it a great investment."

 

Fitz-Gerald goes on to point out that the current SHAK P/E multiple is 1,000, meaning that, at this point, investors will have to wait 1,000 years before they see any money coming back from their investment with the current rate of earnings.

When asked by Burnett why he thinks Shake Shack stock is so undeserving of its current premium status, Fitz-Gerald says it has to do with the folks in charge. He's skeptical of CEOs who talk about things they can't explain and qualities that aren't teachable. "I've never had a socially conscious hamburger myself," Fitz-Gerald say, "so I don't know how that plays into the investment philosophy."

But, more than anything else, Fitz-Gerald says the technicals associated with SHAK stock reflect consumer emotions and hope that the company will behave more like a tech IPO on the market.

And that's simply not going to happen.

We've Seen a "Shake Shack Stock" Scenario Before...

"Recent investing history has been very clear about the ultimate fates for companies like Shake Shack," warns Fitz-Gerald, "and investors should pay attention. There are undeniable parallels between Shake Shack and another infamous stock story in investing circles."

He's referring to a much-loved confectionary chain that IPO'd at $21 per share way back in 2000 - Krispy Kreme Donuts (NYSE: KKD).

By 2003, KKD's stock had reached an all-time high of nearly $50 a share. And in 2004 it reported sales of $665.6 million generated by nearly 400 stores and profits of $94.7 million.

But then a diet fad swept the nation, so thoroughly devastating the stock's value that, to this day, KKD only trades at 39% of its peak. That diet fad was the Atkins diet. Suddenly, everyone was swearing off carbs, especially bread.

And KKD lost 85% of its value.

"Anything new goes through a honeymoon period. From shoes to hamburgers, the public loves to try new stuff. It's the American way," Fitz-Gerald says, But, he warns, "Novelty wears off. Management actually has to prove it understands how to run a business, not just make fantastic donuts using a fabulous recipe. Neither Dunkin Donuts nor McDonald's experienced the 'Atkins effect,' in case you're wondering."

There are other similarities between Krispy Kreme and Shake Shack stock that should have investors concerned.

Fitz-Gerald lays it all out in this article about disregarding hype-driven stocks - because they'll only interrupt your forward journey toward financial independence and wealth. Get these frightening Shake Shack stock numbers here...

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