Is Shake Shack Inc. (SHAK) still a worthy equity investment?
Alger, an investment management company, has published its letter to investors “Alger Small Cap Focus Fund” for the third quarter of 2021 – a copy of which can be found. downloaded here. The largest sector weightings in the portfolio during the third quarter were healthcare and information technology. The largest sector overweight was healthcare. The portfolio had no exposure to the financials, materials, real estate or utilities sectors. You can check out the top 5 holdings in the fund to get a feel for their top picks for 2021.
Algiers, in its letter to investors for the third quarter of 2021, mentioned Shake Shack Inc. (NYSE: SEQUER) and discussed his position on the company. Shake Shack Inc. is a New York-based restaurant company with a market capitalization of $ 2.9 billion. SHAK has achieved a -16.63% year-to-date return, while its 12-month returns are down -5.43%. The stock closed at $ 70.68 per share on October 22, 2021.
Here’s what Algiers has to say about Shake Shack Inc. in its Q3 2021 letter to investors:
“Shake Shack, Inc. was one of the main obstacles to performance. Shake Shack is a modern “roadside” burger stand serving a classic American menu of premium burgers, hot dogs, fries, shakes, ice cream, beer, and wine. Founded by Danny Meyer’s Union Square Hospitality Group (“USHG”), Shake Shack was created by leveraging USHG’s expertise in sourcing premium ingredients, community building, hospitality, gastronomy and catering operations. There are currently 339 locations, including restaurants in 32 US states and the District of Columbia and 116 international locations in cities such as London, Hong Kong, Shanghai, Singapore, the Philippines, Mexico, Istanbul, Dubai, Tokyo, Seoul and more Again.
Shake Shack stocks underperformed in the third quarter due to a slower than expected recovery in urban areas and lower than expected margin prospects. Sales in urban locations were still down 18% year-on-year in July compared to a 23% drop in May, a modest improvement but below expectations. We believe that a delay in returning to work has caused a temporary blockage in the recovery of company margins, but this should improve as urban mobility increases and foreign tourism normalizes. On the margins, the company moved towards margins of 15 to 17% at the restaurant level, which was below expectations of 18.9%. These margin prospects took into account a rise in wages, which the company will begin to offset with a 3.5% price increase in the coming months. We believe that recovering margins can potentially follow a recovery in sales, so declining revenues in the short term can lead to weak margins, but we believe the company is well positioned when the environment normalizes as the pandemic will end. Ultimately, we believe the pandemic has accelerated Shake Shack’s digital efforts, so the company is currently positioned to have a strong online presence. Digital only made up 12% of sales in the first months of 2020, but that figure rose to 47% in the second quarter of this year. “
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According to our calculations, Shake Shack Inc. (NYSE: SHAK) failed to secure a spot in our list of 30 most popular stocks among hedge funds. SEQUER was in 20 hedge fund portfolios at the end of the first half of 2021, compared to 23 funds in the previous quarter. Shake Shack Inc. (NYSE: SHAK) generated a return of -30.03% in the last 3 months.
The reputation of hedge funds as savvy investors has been tarnished over the past decade, as their hedged returns could not keep up with the unhedged returns of stock indices. Our research has shown that small cap hedge fund stock selection managed to beat the market by double digits every year between 1999 and 2016, but the margin for outperformance has shrunk in recent years. Nonetheless, we were still able to identify in advance a select group of hedge funds that have outperformed S&P 500 ETFs by 115 percentage points since March 2017 (see details here). We were also able to identify in advance a select group of hedge funds that underperformed the market by 10 percentage points per year between 2006 and 2017. Interestingly, the margin of underperformance of these stocks has increased in recent years. Investors who are long in the market and short on these stocks would have reported more than 27% per year between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: none. This article was originally published on Monkey initiate.