As an old-fashioned burger joint that has a bit of a cult-like following, Shake Shack (SHAK) has always had a solid fundamental story, observes Mike Cintolo, editor of Cabot Top Ten Trader.
But the stock has turned strong during the past two months because big investors are coming around to the view that the firm’s rapid expansion plan will bear fruit going forward. The company had just 21 stores at the end of 2012, but that figure grew to 84 in 2015 and 159 at the end of last year!
That breakneck pace of growth might seem unsustainable, but management isn’t slowing down—the firm expects to end this year with more than 210 locations, including 35-ish domestic openings and 15-ish international openings through licensed partnerships.
Such a rapid growth path has kept revenues cranking ahead (27% to 31% for the past three quarters), and cash flow has been solid, too (EBITDA rose 32% in the first quarter).
Earnings have been hit or miss, though that could be changing—the first quarter’s bottom line of 15 cents per share came in seven cents above expectations and were up 50% from a year ago.
Analysts are still skeptical (they see earnings down a bit this year), but the action of the stock suggests institutional investors believe the firm has turned the corner. It’s a good story.
SHAK bottomed out around $30 numerous times from early 2016 through September 2017 before barreling ahead to $48 last December. Then came a great-looking base and a powerful breakout in May.
And since then the stock has moved as high as $70 before pulling back toward its 10-week line. Most times, the first pullback to that line after an initial breakout is buyable, so we think grabbing shares of Shake Shack here makes sense.
