Shake Shack currently trades at $90.50 per share and has shown little upside over the past six months, posting a small loss of 3.9%.

Is there a buying opportunity in Shake Shack, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is Shake Shack Not Exciting?

We're sitting this one out for now. Here are two reasons we avoid SHAK and a stock we'd rather own.

1. Weak Operating Margin Could Cause Trouble

Operating margin is an important measure of profitability for restaurants as it accounts for all expenses keeping the business in motion, including food costs, wages, rent, advertising, and other administrative costs.

Shake Shack was profitable over the last two years but held back by its large cost base. Its average operating margin of 2.4% was weak for a restaurant business. This result is surprising given its high gross margin as a starting point.

2. Previous Growth Initiatives Haven’t Paid Off Yet

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Shake Shack historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 0.1%, lower than the typical cost of capital (how much it costs to raise money) for restaurant companies.

Final Judgment

Shake Shack isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 66.6× forward P/E (or $90.50 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.

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