Fancy fast food equities surge in U.S. publicly traded eateries
INVESTORS seem willing to pay just about anything for a better burger.
Half a dozen food chains have held piping-hot stock market debuts in the past year to meet a growing appetite for “fast-casual” restaurants catering to younger and more affluent diners willing to pay more for fresher, higher quality fare than they expect to find at traditional fast food places like McDonald’s.
Wall Street hopes the new crop of publicly traded eateries will replicate the success of Chipotle Mexican Grill Inc (CMG.N), which has grown to about 1,800 restaurants since its 2006 debut. With consumer spending showing signs of improvement and more diners keen on antibiotic-free meats and other healthy foods, now is a great time for restaurants in that niche, especially ones adept at building grass-roots buzz and loyalty, experts said.
But investors have pushed the shares of some of those restaurants – Shake Shack Inc (SHAK.N), Zoe’s Kitchen Inc (ZOES.N) and Habit Restaurants Inc (HABT.O) – to sky-high levels that imply growth expectations that may prove hard for the management to deliver.
Shake Shack – the big outperformer – is up 260 percent since it went public at the end of January. As a group, shares of established restaurant companies have outperformed the broader stock market exponentially, with the Dow Jones U.S. Restaurants & Bars Index .DJUSRU (which doesn’t include these newcomers) rising 11 percent this year, compared with the Standard & Poor’s 2 percent increase.
Based on the number of locations open at the end of 2014, Shake Shack’s current stock price values its restaurants at $40 million each, four times the stock market value of a Chipotle restaurant and 15 times the value investors assign to a McDonald’s Corp (MCD.N) restaurant.
Brad Lamensdorf, who co-manages the AdvisorShares Ranger Equity Bear ETF (HDGE.K), said he would short Shake Shack’s shares, except that his broker has none left after lending his last at a staggering 65 percent annual interest rate. At that rate, short sellers would have to pay out more than 5 percent of their investment every month while waiting for Shake Shack’s stock to fall, which may not happen.
“Just because a stock looks expensive doesn’t make it a great short. It’s way too expensive to borrow,” Lamensdorf said, adding it might become more feasible in July after insiders restricted following Shake Shack’s January IPO are allowed to sell their shares. Almost 40 percent of Shake Shack’s shares are currently short-sold.