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Shake Shack’s Stock Fell on Wedbush Downgrade

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Stock performance

Shake Shack (SHAK) fell after Wedbush Securities downgraded the stock. At the end of September 26, 2017, the company was trading at $31.91, a fall of 5.1% from the previous day’s closing price.

Also, Shake Shack’s stock is under pressure due to competition from fast food restaurants. The measures that fast food companies have taken such as improving the quality of menu items, removal of artificial ingredients, and enhancement of customer experience through the implementation of digital advancement are putting pressure on fast casual restaurants’ sales. Pentallect, an industry consulting firm, expects sales growth in the fast-casual sector to deaccelerate by 6% to 7% in 2017.

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Year-to-date performance

2017 continues to be a tough year for Shake Shack. The company’s stock price has fallen 10.8% since the beginning of 2017. During the same period, the stock price of peers Chipotle Mexican Grill (CMG) and the Cheesecake Factory (CAKE) have fallen 15.4% and 30.1%, respectively.

The S&P 500 Index (SPX) and the Consumer Discretionary Select Sector SPDR Fund (XLY) have returned 11.5% and 9.8%, respectively. XLY has invested 11.6% of its holdings in restaurant and travel companies.

Valuation multiple

Wedbush’s downgrade led to a decline in Shake Shack’s stock price and its valuation multiple. As of September 26, 2017, Shake Shack was trading at a forward EV-to-sales (enterprise value to sales) ratio of 2.69x compared to 2.84x before the downgrade. On the same day, peers Chipotle and CAKE were trading at 1.74x and 0.80x, respectively.

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