Prudent Man: Is the Shake Shack IPO a tasty Wall Street bet?

The trend is your friend. Until it’s not. Fashionable, allegedly eco-friendly fast-casual dining chains look good up front. But will they make you money?

Shake Shack Toffee Concrete.
Mmmmm. Shake Shack's Toffee Concrete will give you a sugar rush for sure. Maybe like its upcoming IPO? Or not. (Credit: Robyn Lee/Flickr, Creative Commons)

WASHINGTON, January 24, 2015 – After an anemic beginning last in mid-January, the initial public offering (IPO) market for 2015 is likely to hit its stride this week with a string of tempting new companies, several residing in the fire-hot but risky niche areas of tech and biotech startups.


READ: Wall Street in chaos. Shake Shack [SHAK] IPO fans don’t care

For example, cloud-computing newcomer Box, Inc. (BOX) was priced at $14 Thursday evening and exploded as high as $24 and change when it opened for trading late Friday morning.

Shake Shack burger.
A tasty, virtuous Shake Shack burger. Will their IPO this week prove to be as satisfying? (Image via Shake Shack website)

Another hot area: upscale, fast-casual dining, a niche that will be represented this week by the IPO New York’s popular Shake Shack chain of restaurants.

A snippet of verbiage via 24/WallSt—likely derived from the IPO prospectus—gives us a factual handle on the chain’s upcoming offering:

Shake Shack Inc. is a fast-casual restaurant featuring premium hamburgers and other foods. The company plans to sell 5 million shares in an expected price range of $14 to $16 to raise $75 million at a market cap of around $532 million. Joint bookrunners for the offering include J.P. Morgan, Morgan Stanley, Barclays, Goldman Sachs and Jefferies. Co-managers are William Blair and Stifel. Shares are scheduled to price on Thursday and begin trading Friday on the New York Stock Exchange under the ticker symbol SHAK.

Having already begun its growth trajectory outside of New York City, Shake Shack Inc., via Wall Street and its indefatigable offering syndicate and media pitch men, is trumpeting its trendy, tasty menu and politically correct beef sourcing as the next big thing.

Read: Stock trading tips for a troubled Wall Street Monday

Most articles in both the regular media and tech and foodie fanboy sites alike have also been waxing ecstatic about the imminent arrival of SHAK shares.

Screams a headline from The Guardian, the UK’s leftist house organ of choice:

Shake Shack rocks McDonald’s to its foundations – but which is better?

Do we already know the answer to that rhetorical question, or what? The acid-tipped virtual pen of one Guardian commenter puts this claim in perspective:

Shakes McDonald’s to it’s [sic] foundations”? Jeesh. What an over-kill headline! So, some guy had a vision to do well, then started to Get Paid, and finally said “So long vision – Show me (some more) Money!

The real story is that over-priced fast food continues to make it’s [sic] way around the globe when what the 99% could use is access to fresh, organically grown healthy foods. Try and do your job Guardian.

Such skepticism would never penetrate the cranium of LinkedIn “Influencer” Clark Wolf, whose breathless description of Shake Shack’s perfections might almost want to make the Prudent Man catch an Amtrak train to New York to try one of their burgers at their original location. (Oops, no need—there’s now a Shake Shack in Tyson’s Corner and several locations in DC.)

Shake Shack, F St. NW, Washington, DC.
Shake Shack store on F St., NW near the International Spy Museum, one of the chain’s 5 current locations in the DC area. (Via F St. Shake Shack page)

Clark intones an appealing politically and ecologically correct litany of Shake Shack’s virtues:

Shake Shack tells you the name of the butcher and talks origins and ingredients. Mickey D’s promises to stop using those ammoniated meat dregs. But even Carl’s Jr. has gone for grass-fed beef. C’mon, Mickey! (And let’s not even get in to McDonald’s controversial new ad campaign, meant to stir emotions by showing messages like “We Remember 9/11” and “Boston Strong” on its signs; again, food quality, not marketing, should be the company’s focus now.)

We’re in a moment of game change, across the board, for food, nutrition, farming and everything that goes with all of it. And if you talk to smart ranchers, you know that grass-fed beef that doesn’t taste good is produced by less-than-stellar ranchers. Lazy and cheap just doesn’t work for food short- or long-term anymore. But especially long-term. A sustainable business doesn’t mean some hippy dippy notion of purpose-driven not-for-profits. It means it works, for everyone, long-term and without causing harm. And it can taste just great. Read Nicolette Niman’s well-regarded new book, Defending Beef, and learn why it might just be ecologically smart as well.

Tell you the name of the actual butcher?? OMG, it just sends a frisson up the Prudent Man’s backbone just to think of it.

Read: Greece, Syriza, Tsipras and snow bury Monday stock trading

The hippy-dippy payoff in California-resident Clark’s paean to alleged ingredient nirvana is his last sentence above, which pitches yet another dreary eco-fanatic text, “Defending Beef,” which allegedly will teach you to be “ecologically smart” via activities like inhaling Shake Shack burgers and Toffee Cement.

“Eat at Shake Shack and be perceived by all your friends as a paragon of Green Perfection.” Simple, easy. It’s a closed-circle appeal to that all-important appearance of proclaimed virtue that still gets you invited to all the best parties in lefty circles. So what’s not to like? Buy the burgers, read the book, spread the eco-friendly Gospel of Green.

Shake Shack at Nationals Stadium, DC.
Play Ball! Golly, you can even gorge on Shake Shack products at Washington Nationals Stadium! (Image Via Shake Shack Nat’s Stadium web page)

By simply clicking a link in Clark’s online prose poetry, however, we quickly discover he heads up his eponymous Clark Wolf Company; which, his LinkedIn profile tells us, “was formed in 1986 to provide consulting services both to food, restaurant and hospitality businesses and to organizations which require the services of such businesses…. Clark Wolf Company is involved with both trend setting and classic, established operations. Clients include Restaurants, Hotels, Resorts, Casinos, Entertainment Venues, Public Institutions, Accounting Firms, Specialty Food Stores, Real Estate Developers, Property Holders & Managers, Supermarkets, Food & Beverage Producers, Marketing Boards and Public Relations Firms.

Is it just possible that Clark might be “involved” with “trend setting” leading up to Shake Shack’s IPO by promoting this budding restaurant chain’s product purity and ecological virtue. It’s a neat closed circle, a perfect feedback loop. Promote virtue, make money. But there’s nothing about that motive in Clark’s suspiciously uncritical fanboy-style promotion of Shake Shack.

The Wall Street Journal online provides a more sober assessment of SHAK’s corporate virtues and stock possibilities:

Shake Shack’s IPO is unlikely garner it a billion-dollar-plus valuation that so many startups are getting these days.

Yet if the recent IPOs of its competitors are any guide, Shake Shack could reward investors on the first-day of trading and over its first few months as a public company.

“Investors have been paying up for growth,” said William Preston, a research analyst at Renaissance Capital, a firm that manages ETFs for IPOs. The burger chain founded by restaurateur Danny Meyer said in a regulatory filing Tuesday that it expects to sell 5 million shares between $14 and $16. At the high end of that price range and if underwriters exercise their overallotment option, Shake Shack would raise up to $92 million and would be valued at $580 million…

Mr. Preston said that only a few restaurant chains are predicting the type of growth that Shake Shack is. Fast-growing restaurant chains that have gone public in the past two years have all pushed up their valuations during the road show and seen their shares pop in the public markets.

Dupont Circle (DC) Shake Shack.
Chow down on virtuous Shake Shack burgers and shakes near Dupont Circle, 18th and Connecticut NW in DC. (Image via Dupont Circle Shake Shack website)

In other words, the prevailing pre-IPO hype is likely marketing overkill at best. Writing for The Motley Fool, Rich Duprey would seem to agree with this observation in his more sober assessment, examining SHAK as an investment possibility.

While Wall Street seems agog with the chain founded by celebrity restaurateur Danny Meyer, there doesn’t appear to be a foundation to support Shake Shack’s potential $560 million valuation.

Investors would do well to be wary for these six reasons before taking a bite out of this glorified burger stand:

  • The market is becoming saturated with “better burger” restaurant
  • Stores are opening at a faster clip than revenue is rising
  • Sales growth is slowing
  • Average unit volume at restaurants is declining, sometimes dramatically
  • Beef costs are rising

Duprey cites the fairly recent fate of another burger darling’s fairly recent IPO:

When similarly positioned burger joint The Habit went public last November, its stock was also inflated by talk of fast growth and expansion. Offered at $18 a share, the stock opened at $36, went as high as $44 a stub, and today is back down around $30 a share.

Shake Shack, Union Station, DC.
Taking Amtrak from DC? There’s a Shake Shack just for you at Union Station. (Image via Shake Shack Union Station web page)

No doubt Shake Shack−particularly due in large part to the endless hype surrounding its upcoming IPO−will also make a grand entrance to the public markets. But investors would do well not to chase this one up. No matter how many virtuous people love its burgers and shakes, the currently unprofitable company’s ability to respectable same-store sales will grow more difficult amid thick competition and headwinds caused by record-high beef costs.

This is particularly true for a chain like Shake Shack that has thus far generated increased sales simply by opening more stores. That makes sales numbers somewhat misleading at least in the short run.

Ultimately, you pays your money, you takes your chances with fad IPOs, as borne out by the current fate of The Habit (HABT) and similar IPOs.

Read: As Redbox business fades, Outerwall (OUTR) CEO takes a hike

IPOs, if you can get them, is a game of chance. The Prudent Man recently made some good money on a pair of them in late 2015 before dumping them for a nice profit.

But there are also problem, over-hyped IPOs like the recent Patriot National (PN). The Prudent Man tried a crapshoot for fun, taking down 100 shares of this one. That turned out to be un-Prudent and not very fun. This debt-burdened benefits management and outsourcing firm sank like a rock after it priced at at a notably lower price than its original offering spread. But then again, PN was not a particularly “hot” offering, so a flat opening was probably to be expected, even after that price cut.

SHAK, on the other hand, appears to be hot and is likely to stay hot through the close of its offering period, again slated to occur Thursday evening when the shares get their final pricing and when allocations are determined by participating brokerages.

If you’re not part of the 1%, if you’re not a client of the listed brokerages above (or others that are part of the underwriting syndicate) and if SHAK really does prove a hot one, you can still put in for shares, though you’re not likely to get any. Ditto for the Prudent Man.

Tysons Corner (VA) Shake Shack.
Even Northern Virginia has been graced with a Shake Shack at, where else, Tysons Corner. Shack employees are ecstatic. (Image from Shake Shack’s Tysons Corner web page)

If there is some availability, the Prudent Man will likely put in for a few shares. After all, he cynically made money on the Obama-hyped A123 IPO a few years back, pulling out well before that taxpayer-supported dog went Chapter 11 and was sold to a Chinese firm for pennies on the taxpayer dollar. But should the Prudent Man get any shares of SHAK−highly unlikely−he will sell them as soon after acquisition as possible, namely 31 days after the IPO according to the terms of his broker.

If you want to take a risk like this one, BTW, always do it with “mad money” (money you can afford to lose) or don’t do it at all. And keep in mind, the decision is up to you, not yours truly. We provide research, comments, and play-by-play action here, not recommendations.

The market has been particularly volatile this month as well. So whatever you do, always remember: The trend is your friend. Until it’s not.

As Duprey notes in his concluding Shake Shack graf:

Pick your poison — better burger stands on every corner to slowing growth, rising costs, supplier concentration, and dubious staying power — Shake Shack presents significant risks. It might not be just a flash in the pan restaurant chain, but it doesn’t look to be a beefcake stock, either.

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Terry Ponick
Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17