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Two of the roughest, most failure-prone sectors in the stock market have always been—and probably always will be—restaurants and retail. Competition is brutal in both spaces, margins are usually slender, and bankruptcy always seems to be one poor management decision away.
I’ve written about the slow-motion train wreck of the traditional retail sector fairly regularly over the last couple of years, and with several large operators like Nordstrom’s and Kohl’s posting surprisingly decent earnings lately, I thought it might be a good time to check back again. Could brick-and-mortar retail be on the brink a comeback?
Shake Shack, like GoPro and Fitbit, was once a high-flying, wildly valued cult stock whose shareholders loved the company’s products. Yesterday, that affair ended abruptly, with SHAK falling $5 to $37 on disappointing guidance for 2016. The former fast casual darling is now down 60 percent from its $97 peak last May. Investors who look at price, and not valuations, might think this is a good entry point.
Unless you’ve been living under a rock or on a commune somewhere, you know the big news in the markets over the past few weeks has been the plummeting price of oil. With domestic production at record levels thanks to the fracking revolution and OPEC stubbornly refusing to cut production, oil is getting cheaper and cheaper. Investors have predictably responded by selling off energy company stocks in a big way. That makes sense. Lower prices mean lower profits and, especially for smaller producers, possible bankruptcy.
But there are two related stories to the drop in oil that don’t make sense, in my opinion–and they could signal potential opportunities on the long and short side.
This past week’s sell-off might signal the beginning of the end to several recent manias, especially in the biotech, social media, and cloud computing sectors. But, to my amazement, one mania seems to be going strong. As just about every stock in the markets got eaten for lunch on Friday, a new restaurant company called Zoe’s Kitchen debuted—and jumped 65 percent.
I know a fair amount about the restaurant business, both the good and bad of it. I am lucky enough to own a restaurant that’s doing quite well (knock wood). A few years back, I owned another restaurant that didn’t do well. Like most eateries, it failed in less than three years. As a money manager, I’ve been studying the industry and investing in restaurant companies for thirty years, and I’ve never seen anything like this “fast casual” craze.