Shake Shack Comeback Looks Appetizing

A 5.5% jump on Friday was enough to give shares of Shake Shack (NYSE: SHAK) one of their highest closes since February, before the coronavirus pandemic took 60% off them. All the early signs on Monday point to the fast food chain, famous for their burgers, wanting to build on that momentum this week.

While the likes of McDonald's (NYSE: MCD) and Wendy’s (NASDAQ: WEN) have both fully recovered from Q1’s crash and undone the damage, Shake Shack has had a harder time of it. As part of this summer’s stunning recovery in equities, shares of the $2 billion, New York headquarter company managed to bounce more than 110% through the start of June. But that’s been the highwater mark of the recovery so far and since pulling back from those levels shares have put in a few months of sideways consolidation.

Lagging Behind Peers

In the grand scheme of things, this is healthy, especially as they’re now starting to look strong enough to test June’s high and see if they can push on past it. However, in the context of this summer, their performance must be a little deflating for investors. Wall Street has watched tech and e-commerce names power to all-time highs as have fast-food names like Chipotle (NYSE: CMG) and Domino's Pizza (NYSE: DPZ). The likes of McDonald's and Wendy’s have at least returned to pre-COVID levels. But shares of Shake Shack are still down 25% from February’s high and still trading at 2015 levels.

As Cowen noted last month, the company is heavily dependent on in-person purchases at its urban locations and so is particularly exposed to coronavirus shutdowns in cities like New York, Chicago and Los Angeles. Unlike the other aforementioned fast-food chains, Shake Shack doesn’t do drive-thru and had barely made a dent into online ordering for pick up prior to the pandemic.

Management are surely kicking themselves for these crucial gaps but hindsight is 20/20 and all that. But they’re making moves in those areas and as hopes continue to build on a vaccine and cities continue to reopen, the upside to Shake Shack continues to grow.

Fast-Tracked Recovery

Late last week, Wedbush was out with an upgrade to the stock and moved shares up to an Outperform rating from Neutral. Analyst Nick Setyan believes that many of the gaps identified by Cowen last month have started to be filled in and that much of the potential downside has already been priced into shares. For example, the company’s fiscal Q2 earnings last month didn’t sugar coat anything, with revenue down 40% year on year and coming in lighter than expected, as did EPS.

In a bullish note to clients last week, Setyan said  "Shake Shack was the preeminent growth story within restaurants pre-COVID, and we believe the growth story is even more attractive post-COVID. As management accelerates digital investments and aggressively targets multiple unit formats, we believe Shake Shacks’ LT domestic company unit target of 450 could prove meaningfully conservative." He also boosted his price target on the stock from $53 to $77. Were they able to make that 32% jump from Friday’s close price, it would put them at 52-week highs.

This kind of fresh momentum is the perfect kind of scenario for a comeback play and investors should be watching for Shake Shack to narrow the gap established by its competitors. Technically, there’s plenty for investors to chew on with a rising trend line offering a good entry point as well as support. June’s $64 level is the first target for shares and if they could take this out without much work, then the recovery to pre-COVID levels would well and truly be on.