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Shake Shack Inc (SHAK) Jumps 10% In Pre-Market After Impressive Second Quarter Earnings: Is It A Buy Now?

Among the top gainers in pre-market today was Shake Shack Inc (NYSE:SHAK), whose stock extended the gains in the morning trading session and advanced by around 5% on the back of positive financial results. The company posted net earnings of $3.4 million or $0.09 per share for the quarter, 200% more than the Street’s expectation, while its revenue of $48.5 million beat the estimates by around $5.5 million. In addition, Shake Shack’s same restaurant sales increased by 12.9% during the quarter, vs. expected growth of 8.6%. Shake Shack Inc (NYSE:SHAK) went public on January 29 with an IPO price of $21 per share and the stock has gained a whopping 230% since then.

Shake Shack Inc (NYSE:SHAK) also announced a secondary offering of 4 million shares with a 30-day option for underwriters to buy an additional 600,000 shares. The chain of restaurant also revised its outlook for the fully year and currently forecasts a total revenue between $171 million and $174 million for the year as opposed to analysts’ expectation of $171 million. The company now expects the sales to grow mid-single to high-single digits, from low-single to mid-single digits before.

Analysts have not yet  provided their updates on the stock following the earnings results. However, earlier this year Stifel downgraded Shake Shack to ‘Hold’ from ‘Buy’ in April. Moreover, Morgan Stanley and Goldman Sachs downgraded the stock to ‘Underweight’ and ‘Sell’, respectively, in July.

During the first quarter there were six hedge funds who initiated stakes in Shake Shack Inc (NYSE:SHAK) and bought shares worth $8.2 million by the end of March. In this way, hedge funds held only 0.5% of the company’s outstanding stock at the end of March. As the current round of 13Fs is about to be completed, we will probably see an increase of the stock’s popularity among hedge funds based on its outstanding performance following the IPO.


We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about 6 basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 65 percentage points (123% return vs. S&P 500’s 58% gain) over the last 35 months (see the details here).

Taking all of this into account, let’s take a look at key actions encompassing Shake Shack Inc (NYSE:SHAK).

How are hedge funds trading Shake Shack Inc (NYSE:SHAK)?

Among the hedge funds tracked by Insider Monkey, Joe DiMenna’s Zweig Dimenna Partners held largest position in Shake Shack Inc (NYSE:SHAK), which contained 57,100 shares at the end of March, but the investor closed its stake during the second quarter. Warren Lammert’s Granite Point Capital also unloaded 9,500 shares and closed the position in April. Other investors with long positions include  Doug Gordon, Jon Hilsabeck and Don Jabro’s Shellback Capital with 45,000 shares and Guy Shahar’s DSAM Partners with 40,000 shares at the end of March.

Overall, the sentiment around Shake Shack is uncertain because the stock did not gain enough momentum at the end of March. Moreover, some of the investors chose to close their stakes during the second quarter in order to benefit from the stock’s appreciation. If we will see more funds with new positions as of the end of June, it will probably signal that smart money are bullish on the stock, even though there is a big chance that they consider it overvalued and will wait for a drop in order to initiate a long position.

Disclosure: None

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