- Shake Shack rose to the heights after its January IPO but has since fallen to Earth.
- McDonald's is considered a nowhere stock, but has actually done better this year overall.
- The story of Krispy Kreme.
Shake Shack (NYSE:SHAK) has been one of the big Wall Street stories of 2015. Since its IPO in January the stock has taken investors on a truly wild ride. The first trade came in at nearly $46/share, and in May the stock topped out at nearly $93. But what goes up must come down. Despite a rise to nearly $71 in early August, Shake Shack began trade Friday at $44.68. That’s below the first public trade.
Meanwhile, analysts have been disparaging McDonalds (NYSE:MCD) as a nowhere company with a nowhere stock. For most of 2015 it has traded in a flat line. But that began changing in October, after CEO Steve Easterbrook put its highly-profitable breakfast menu on all day, and it will open trade Friday at about $114, up 22% on the year.
That’s right. McDonald’s is actually the better play. It’s also a better investment for next year, and the year after that, and the year after that.
Don’t get me wrong. Shake Shack has growth. Quarterly sales are up by nearly two-thirds between September of 2014 and the same period this year. Operating margins have turned positive, with nearly 15% of revenue falling to the operating income line.
But Shake Shack is still just a small chain of 63 stores, mostly located in the northeast, selling a very limited menu, mainly burgers, crinkle fries and milk shakes. They are good, but Krispy Kreme (NYSE:KKD) are also good.
You may not remember Krispy Kreme. The doughnut maker was the Shake Shack of the early 2000s. While the dot-com bubble was bursting, KKD rose to the sky, splitting twice and going as high as $48.90 in 2003. Then the sugar hangover came in. It now trades near $14.
What if you had bought McDonald’s way back in 2001, instead of Krispy Kreme? During the height of the mania you would have looked pretty foolish. McDonald’s fell nearly 50% during the dot-com bust. But it slowly recovered. While Krispy Kreme today is worth about 30% more than it was worth in 2001, McDonald’s is now worth 200% more than it was then.
Despite CEO Easterbrook, McDonald’s remains, at heart, a troubled company. All-day breakfast is a one-off move. He still has to update the menu, update the restaurants, and convince the public that his restaurants aren’t just selling “factory food.”
But Easterbrook did precisely that for the company in England. There the company proudly says it serves, not just beef, but “English and Irish beef.” Not just potatoes, but “whole British potatoes.” Not just chicken, but “100% chicken breast meat.” English McDonald’s have a “signature collection” of fat, really juicy burgers, and it’s considered a decent restaurant.
Given some time, he is likely to do the same thing here. McDonald’s actually had lower sales in the September quarter, $6.6 billion, than in the same quarter the year before, nearly $7 billion. That represents just the franchisor’s take – the actual sales of all the chain’s restaurants, which are mostly owned by franchisees, was much, much more than that. But since Easterbrook came on board, right about the time of the Shake Shack IPO, margins have begun inching back up again, and stood at over 25% for the September quarter. Again, on $6.6 billion of revenue.
Shake Shack’s revenue for the third quarter? It was $53.27 million.
Shake Shack vs McDonald’s
The point is there are many ways to play the stock market. You can trade, getting in-and-out of stocks quickly. You can speculate, betting on a big score and, hopefully, escaping before the boom busts. Or you can invest, putting money to work on good, large companies that are going to pay off for you in the long run.
McDonald’s is an investment. Shake Shack, while it has good burgers, is a speculation. And we know what happens with those. Ask someone with money in Krispy Kreme.