Shake It Up

By Malcolm Berko

April 8, 2015 5 min read

Dear Mr. Berko: I don't want to miss out on the next Chipotle or Panera Bread. So I decided to buy 500 shares of Shake Shack in my individual retirement account at $51 right after it came public at $21 in January. Its restaurants make great cheeseburgers, great fries and great milkshakes. Several times, my wife and I have had dinner at a Shake Shack that is close to where our grandchildren live in Chicago. Shake Shack also sells beer and wine, which are extremely profitable, and I really thought that this would separate it from McDonald's, Burger King, Sonic, Checkers and others and that the stock would take off. It went up to $52 after I bought it, but now it looks as if it's stuck at this level. All my other IRA investments have good earnings and pay good dividends, but this one doesn't, which is why my broker didn't want me to buy the stock. Now she is advising me to sell Shake Shack and take a small loss because she thinks it's as high as it can go. Then she wants me to use that cash to buy 600 shares of AT&T. She had me buy 400 shares of it last summer at $35. What is your opinion? This investment represents about 5 percent of my IRA. — CL, Chicago

Dear CL: I like your broker. In fact, I like her a lot. Buy her a Kate Spade purse.

In late January of this year, J.P. Morgan and Morgan Stanley took Shake Shack (SHAK-$49) public with an initial public offering of 5 million shares at $21. And in less than a femtosecond, the shares of this hamburger joint exploded to $52. Cheese and crackers got all muddy, I was so bloody surprised that you could have knocked me over with a fender. SHAK is another mundane fast-food burger joint that will occupy 1,500 square feet of real estate for the time period of its lease, after which it's likely to fold its tent and steal away. SHAK peddles the "same old, same old" hamburgers, hot dogs, french fries, milkshakes, malts, soda pop and ice cream as Five Guys, Hardee's, McDonald's and Sonic. But unlike Wendy's, Wally's and White Castle, SHAK also sells beer and cheap wine with its burgers and dogs. However, SHAK's entry on the burger business has had about as much of an impact on the fast-food scene as the advent of another mosquito in a cesspool would have.

I also believe that you'd be stuck owning SHAK at $51 for a long, long and long time if you were to wait for it to get above that price. In a mad frenzy and with FOMO (fear of missing out), investors incredulously bid up the share price from $21 to $52. Frankly, I can't imagine even two good reasons SHAK should not trade 40 points lower. There are no income statements or balance sheet numbers (even future projections) that would support a $51 price. The current market capitalization is a dangerous and ridiculously high $540 million. SHAK reported revenues of $162 million from 66 units, an amount I find difficult to accept. That's $2.5 million in revenues per unit, whereas an average McDonald's averages $2.6 million in revenues per unit. And SHAK reported a loss for its most recent reporting quarter. This is just one of the zillion common hamburger joints that dot America's streets, and from my catbird seat, it has little redeeming value. I, too, think you would be better off owning AT&T (T-$33), which yields 5.7 percent and has increased its dividend in 24 of the past 25 years.

Of SHAK's 66 operating units, 23 are in Kuwait, the United Arab Emirates, Saudi Arabia or Qatar, where alcohol sales are frowned upon and camel burgers are likelier to be on the menu than hamburgers. There are several units in Turkey and Russia and one lonely unit in London, and the remainder are on the East Coast of the U.S. Please recognize that SHAK is not an investment; rather, it's a rank speculation based on lots of good intentions but more hype, hyperbole and hope than substance. Take your broker's advice and sell your 500 shares at a small loss before it becomes a larger loss.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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