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SHAK And The Burger Bubble

|Includes: Shake Shack (SHAK)

I will make this one quick (fast food, hehe). SHAK makes great burgers.

(Branding, customer experience and "cult" brand perception is of course also important with such food concepts, more on this later)

Comparing SHAK and other new "upscale" burger chain prices, focused on freshly cooked food and more natural ingredients, to traditional "fast food" giants such as MCD or Burger King may be unfair from a value proposition. Customers notice(d) that too and gladly pay a (small) premium for such new offerings.

But what about the value of the stock?

The industry (or was it the industry analysts?) invented all kinds of new terms such as "upscale casual" or "fast casual" to describe these new products and concepts - and differentiate them from fast food and beverage brands mainly focused on low pricing.

While SHAK products deserve a slight premium pricing over "traditional fast food" I can't wrap my head around their current valuation (around $40 up to $50 per share shortly after the IPO).

Other SA contributors came to the same conclusions so I spare you repeating the details and numbers:

(I'm writing this as a big fan of more "up-scale" casual food and beverage concepts/brands because I was really interested in SHAK trading between $10-20/share)

It looks like bubble valuations reached the food and beverage sector.

That's unfortunate. There were solid stocks for long-term investors in the field in recent years:

I will list five stocks below. I had these on and off before joining SA on an active basis, two each from the food and from the beverage sector (plus a dud from the beverage sector):

- CMG (often pricey when looking at, but growing at a fast clip, the PEG ratio was favorable even in 2011 )

Speaking of CMG I still don't understand why MCD divested their stake a few years ago, I think was a great mistake on McDonald's part - and I'm not the only one asking this question:

It's time to tack one on from a split, however amicable: McDonald's (MCD) 2006 divestiture of Chipotle Mexican Grill (CMG), in which the world's biggest restaurant company let go of what would rapidly become the hottest restaurant brand in the land. Chipotle has disrupted everything up and down the food chain, forcing everyone from Taco Bell (YUM) to Chili's (EAT) to scramble to stay relevant. And for what? When it sold out completely seven years ago, after ramping Chipotle up from 16 locations to more than 500, the Golden Arches pocketed $1.5 billion. Chipotle, which has since tripled its store count, is now valued at just more than $13 billion.

- BWLD (The Fool website had been promoting this stock for years, usually I hate over-promoted stocks, but this one worked out fine.)

- MNST (formerly known as HANS. Go Hans! Probably the strongest brand in the energy drink business next to privately held Red-Bull)

- SAM (more and more people are discovering and drinking fine craft beer. While SAM may have become a mainstream brand since going public, it still makes far better beer than the giants. Just look at the SAM's stock price over the past years.

I didn't have all winners of course. I also had a dud (luckily I only added to it in 2008-2009 when it was trading lower) in JMBA fruit juices, the company is still trading below IPO levels today.

If SHAK was trading at $10-15 (or on a stretch up to $20) I would maybe a second look, but not above. At $50 it will take years before it runs into a fair valuation- especially since the company has make a trade-off to make between being "cool", keeping the food quality and expansion:

Shake Shack's challenge, Goldin and other experts said, is not to expand too quickly.

Ubiquity, they said, often works against cult chains.

Shake Shack has 63 restaurants, more than half outside the United States. The company has said it plans to open 10 U.S., company-operated restaurants each year and could eventually grow to at least 450 locations.

Shake Shack, founded by restaurateur Daniel Meyer in 2001, waited five years to open its second restaurant.

Does the current valuation make sense even with 450 opened restaurants (or let's assume a scenario with 1000 SHAK restaurants to go crazy for once) and discounting back to today? Not to me.

Bottom line: Go to SHAK for the food if you like burgers, but skip the stock until it comes down to reasonable levels (you may have to wait a long time to ever or maybe never get a piece of such cult stocks at fair prices - but I never chase after stocks, cult or not).

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.