Stocks

Shake Shack Inc Stock Tumbles After Cramer Comments

Shake Shack shares have quadrupled since the company’s initial public offering as Wall Street got excited about the fast food chain’s expansion plans and growth outlook. However, CNBC’s Jim Cramer warned that Shake Shack has become a cult stock, or “Tesla for burgers.” Following his comments, the company’s shares dipped, falling as much as 5.5% to $87.75 per share, reversing last week’s solid trend of gains for the stock.

Shake Shack

Shake Shack riding high

In a Real Money post on The Street, Cramer explained that the reason Shake Shack shares have climbed so high so quickly has more to do with the dynamics of the current market than with the company’s fundamentals. True, investors are excited that the food chain’s comparable store sales accelerated from 7% growth to 11% growth quarter over quarter. Wall Street also got revved up by the surprise profit posted by the chain when a loss was expected.

Further, the company’s management has revealed rapid expansion plans. They aim to open 10 or more new company-owned stores in the U.S. Shake Shack also has plans to add chicken items to its menu.

Hold ratings on Shake Shack

Cramer’s warning about the fast food chain echoes comments made by every analyst who is following the stock. Miriam Gottfried of The Wall Street Journal notes that all of the analysts who follow Shake Shack have a Hold rating on the stock.

Indeed, it’s easy to see why when looking at the numbers, as the company’s forward earnings ratio multiple is a stunning 600 times.

Shake Shack’s free float is low

What’s particularly interesting about Shake Shack stock is that short interest is pretty high, and its free float is quite low. Less than half of the restaurant chain’s free float is available for trading. That amounts to only 12 million outstanding shares—and approximately 2.4 million of those shares are being sold short. Granted, that’s just 20% of Shake Shack’s outstanding shares, but it’s over 42% of the company’s float.

Gottfried also points out that the turnover on the company’s shares is huge. Based on data from the last 30 days, the average S&P 1500 company turns over its float approximately two-and-a-half times per year. However, Shake Shack has been flipping an average of about 19% of its free float every day.

Lockup expiration approaching

As is the case following most companies’ IPOs, Shake Shack has a lockup expiration coming up. The lockup period ends on July 29, and a regulatory filing indicates that the market will be flooded with shares at that time, freeing up “substantially all” of its outstanding shares for trade. In other words, Shake Shack’s free float is going to nearly double on July 29.

Stocks tend to decline when lockup periods expire, and for good reason based on basic supply and demand. Insiders are usually ready to take some profits as well, so they’re often itching to unload some of their company stock.

Granted, some stocks do survive the expiration of a lockup period, but with Shake Shack’s free float nearly doubling in a single day, it seems unlikely the company’s stock will be one of them.