Option Trade 
Shake Shack Inc (NYSE:SHAK) Calls
Tuesday, November 03, 2015

**OPTION TRADE: Buy the SHAK Dec 2015 45.000 call (SHAK151218C00045000) at approximately $4.50. Place a pre-determined sell at $9.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.80.

by Ian Harvey

November 03, 2015

Shake Shack Inc (NYSE: SHAK), engaged in owning and operating restaurants, is set to report third-quarter earnings on November 5th. The upstart brainchild of famed restaurateur Danny Meyer has been on a rocky ride since its debut in January, and now trades close to its post-IPO lows.

For a new stock especially, an earnings report can be a catalyst for a stock pop, and shares jumped 11% after its last report when the fast-casual chain blew past estimates, posting earnings of $0.09 per share against estimates of $0.03, while revenues jumped 75%, ahead of expectations as well. The company also raised its full-year guidance. With last quarter's momentum, and with the stock having tumbled since then, it should be primed to bounce back.

Shake Shack traded up 2.82% during midday trading on Tuesday, hitting $45.57. The company’s market capitalization is $549.48 million. Shake Shack has a 52 week low of $38.63 and a 52 week high of $96.75. The company’s 50-day moving average price is $47.36 and its 200 day moving average price is $59.43.

There are several catalysts that will benefit Shake Shack….

Average weekly sales, which include sales from all stores -- In its most recent quarter, average weekly sales jumped 7.4% to $102,000.

With average unit volumes around $5 million, Shake Shack essentially does double the sales of any other fast-food chain. Even Chipotle Mexican Grill (NYSE:CMG), the standard-bearer of the fast-casual movement, derives $2.5 million from its stores, a strong number but only half of Shake Shack's total. That's a huge advantage for Shake Shack, and one that will only get stronger if average weekly sales continue to grow.

New products/offerings -- Shake Shack introduced its first chicken sandwich, the ChickenShack, at all three of its Brooklyn locations in July. The new menu item received rave reviews and sold out within two days – and is likely to be available in all stores.

Another intriguing new offering from Shake Shack in recent months has been partnerships with celebrity chefs to serve original, gourmet burgers for one day only.

Insider selling -- One of the biggest factors driving Shake Shack's share price down since August is insider selling. Then, in October, shares fell again when the company issued a similar filing, this time for as many as 26 million shares at a price no greater than $47.28. This has now brought an overvalued stock to a sensible price level.

Shake Shack has crushed estimates in its first two reports as a public company, and another strong beat is expected when it reports earnings. Analysts seem to be underestimating the power of its brand, which is not only fueling huge comparable growth at home, but has also driven monster sales at its international licensed stores. Though its P/E is in the triple digits now, it has the growth to justify it as earnings per share. With a market cap of just $1.5 billion, it has room to grow into a valuation several times that.

Analyst estimates seem low at $0.07 EPS, as the company posted a $0.09 EPS in its second-quarter report, and the summer months are generally the strongest in the restaurant industry, especially for the New York-based company, which thrives off of tourism in the warm months. Same-store sales should continue their strong growth, as a much of last quarter's bump came from price increases.

Harvey’s Options Volatility Indicator

If Shake Shack can deliver the kind of results it did last time, with restaurant-level operating margins around 30%, profits should grow much faster than expected, pushing the stock price higher and bringing the valuation down to a reasonable level.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

**OPTION TRADE: Buy the SHAK Dec 2015 45.000 call (SHAK151218C00045000) at approximately $4.50. Place a pre-determined sell at $9.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.80.

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.

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