The market was red hot last week, but shares of Shake Shack (NYSE:SHAK) were bloodied rare. Shares of the "better burger" restaurant chain declined 12%, sinking after Shake Shack, bucking the trend of an otherwise buoyant market that closed higher in four of its five trading days.
The culprit here is Shake Shack's filing a secondary offering. A whopping 26.16 million shares will be sold. It's not dilutive, and that's not necessarily good news. Shake Shack isn't getting a single penny from the stock sale because it's not printing any new shares. Every single stock being unloaded is coming from a pre-IPO investors.
We knew that insider selling was going to be an issue when Shake Shack soared out of the gate. It went public at $21 nine months ago, more than quadrupling at its springtime peak. The stock has gone on to shed more than half of its peak value, but it has still more than doubled since its market debut. Shake Shack's lockup expiration ended in late July, freeing pre-IPO investors to cash in on the stock's meteoric rise this year. A smaller secondary offering followed the lockup expiration, and now we have a bigger exodus on our hands.
With sentiment turning and the market feeling vulnerable, can you blame some early investors for getting jittery? However, this is problematic -- even if it's a zero-sum event in terms of the outstanding share count and assessing Shake Shack's market cap -- because it dramatically pumps up the public float. There will be a lot more shares out there, making it that much harder for good news in the future to push the stock higher.
One can also argue that the larger float will make it less vulnerable to a sell-off if things don't go well, but Shake Shack's potential catalysts seem far more positive than negative.
Shake Shack is in a surprisingly good place for a stock that has seen its value plunge 55% since nearly hitting triple digits in May. Revenue clocked in with a 75% year-over-year pop in its latest quarter, as a combination of heady expansion and a dizzying 12.9% surge in comps continues to make it one of the fastest growing restaurant chains on the planet.
The news gets even better on the bottom line, where adjusted earnings tripled to $0.09 a share. Shake Shack has blasted through Wall Street's profit targets with ease in its first three quarters as a public company, a calling card for a market darling.
Shake Shack seems to be doing everything right. It's revising its guidance higher. It's picking up the pace of new eatery openings. Analyst earnings estimates have roughly doubled over the past three months. With just 63 locations worldwide, there's still a lot of room to run.
It's easy to see why early investors are moving to take some money off the table, but it's ultimately even easier to see why they will come to regret their decision to bail.