SHAK Stock: This Should Keep Shake Shack Inc. Stockholders Up at Night

SHAK StockOriginal Investors Flee SHAK Stock

Currently America’s hottest burger joint, Shake Shack Inc. (NYSE:SHAK) looks like the next multi-billion-dollar eatery. But looks can be deceiving. Although I personally enjoy Shake Shack burgers, I’m still on the fence about SHAK stock.

The company just saw a huge amount of capital flight. If you noticed a secondary public offering of SHAK stock, then you know what I’m talking about.

The company will issue 26 million Class A shares, of which none are new. There are very few new units of SHAK stock going up for sale because the offering isn’t meant to raise funds for Shake Shack. This is an escape hatch for early investors. (Source: “Shake Shack Form S-1,” Securities and Exchange Commission web site, October 8, 2015.)

The move allows shareholders like Leonard Green & Partners LP and Select Equity Group LP to dump their shares without taking a bite out of the SHAK stock price. The new shares will fill the void.

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So where does that leave the rest of us? Does Shake Shack stock hold potential still?

Shake Shack Stock Is Just One of Many

Shake Shack stock doubled through the first half of the year after going public at the end of January. The growth was rapid, but it vanished just as quickly. SHAK stock price is now hovering around its original trading range of $45.00.

But I mean, let’s be honest, how many restaurants have you seen fail? Of all the little bistros on the corner, how many survived? The turnover rate in the restaurant business is high because everyone thinks they can run a restaurant.

Shake Shack may be among the fastest-growing eateries in the world, and it may have hundreds of locations, but its core business remains just as vulnerable as the bistros on the corner. Consumer tastes can change in a heartbeat.

As an investor, I’m not very bullish on the food and beverage industry. Its transience strikes me as a tough field to navigate, which is fine if the payoff is correspondingly higher. But it isn’t.

And I’m not the only one who thinks that; as Peter Thiel, the famous billionaire who co-founded PayPal Holdings, Inc., has similar concerns about the food industry.

“Don’t bother starting the 10,000th restaurant in Manhattan,” Thiel often says. “Find something to do that if you don’t do it, it won’t get done.”

Think about the abundance of restaurants and his meaning becomes clear. It’s the closest thing you’ll ever see to perfect competition. There are innumerable entrants and exits to the market, not to mention several tiers of pricing.

The value of SHAK stock could dissolve if the company loses favor with customers or if a new food craze grips the market. That makes me nervous. I prefer companies that can defend their market share.

Shake Shack Inc. Hits Maturity

Great businesses strive for monopoly power. Obviously, they must do so in a legal way. But as long as you don’t run afoul of the government’s anti-trust division, your business should try and have a competitive edge that other companies can’t match.

What’s to prevent a new food craze to sweep the nation and render Shake Shack irrelevant? There’s an argument for convenience in the sense that Shake Shack’s locations are already established and easily available.

But even if that argument holds water, there’s no saying that SHAK stock will appreciate. Shake Shack could continue as a profitable enterprise, but capital gains come from increases in a firm’s potential.

That’s what makes investing so challenging. No one can tell what a firm’s true potential is; we just make our best guess. For my part, I’m worried that the investors who helped build Shake Shack are divesting their stock. The growth runway for this company is nowhere near as long as retail investors think it is.

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