Here's Why Shake Shack’s Recovery Builds Momentum

Key Points

• Shares of Shake Shack have rallied since the summer of 2022 but have yet to reclaim previous highs. 
• However, with several key tailwinds in place, it's in a powerful position to retry. 
• This week's comments from TD Cowen should be enough to drive the stock to further gains in the near term. 

With so much talk around tech stocks lately, it can be refreshing to hear about a stock from a completely different industry. Shake Shack Inc. NYSE: SHAK, whose shares have been rallying since the summer of 2022, was singled out by the team at TD Cowen yesterday. 

It's an interesting stock to consider. Shake Shack has yet to complete the feat that Nvidia Corporation NASDAQ: NVDA or Microsoft Inc. NASDAQ: MSFT share highs set in 2021. 

Even with a 170% rally under its belt since bottoming out almost two years ago, the stock, at its current share price of $105, is still far from its $140 high. That's not to say it isn't worthy of our consideration. There's a strong argument that Shake Shack has flown somewhat under the radar because it has not yet reclaimed previous highs. 

Increasingly Bullish Outlook

The team at TD Cowen spoke to this yesterday when it upped its rating on the stock from "market perform" to "outperform." Analyst Andrew Charles is looking for large revisions to the upside of the stock's EBITDA due to improved margin expectations and better spending control. It's also bullish on the prospects of a new CEO joining this year, as the 20-year veteran Randy Garutti is due to retire.

TD Cowen's $125 price target is a street high and points to an upside of some 20% in the near term. This would have Shake Shack shares trading right near their 2021 peak, meaning the stock would have rallied 225% from its low - not bad for a fast-food restaurant. 

There are concerns about how one direction has been used so much in recent trading, as it has built up the stock's relative strength index (RSI) to a boiling point. A reading of anything above 70 indicates overbought conditions, and Shake Shack's is currently right there, having been above 80 just last week. 

There's an argument to be made that being a little patient here with an entry could be beneficial, especially as the stock was starting to soften this week before TD Cowen's comments yesterday. As we've seen with many companies, who've enjoyed a bumper couple of months of trading, some consolidation after a solid run is not bad. 

What the Stock Needs to Do

For Shake Shack, that would mean holding the line above $100 and trading flat or sideways for a little bit. This would reinforce the $100 mark as a serious line of support that would be well-defended during any future bout of volatility. It also forms a strong base from which the stock can start the next stage of the rally, the one that should take it to $125. 

The worst thing that could happen right now is for Shake Shack to give back its recent gains and fall towards the $70-$80 range, where it spent the first half of February. However, if it were to do that, the upside potential would simply have increased by a sizable amount, and the entry opportunity would be nearly too good to miss. 

It's an unlikely scenario anyway, at least in this writer's view, as Shake Shack simply has too many things going in its favor right now. A strong earnings report last month topped analyst expectations, with 20% year-on-year revenue growth, improving margins and bullish analyst comments. 

What's not to like? Look for shares to hold the $100 line through next week, with some fresh forward momentum then likely to set the scene for a march towards TD Cowen's $125 price target.