Shake Shack Stock Gained 20% in February: What You Need to Know

By Markets Fool.com

IMAGE SOURCE: SHAKE SHACK.

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According to data provided by S&P Global Market Intelligence, Shake Shack stock has gained an impressive 20% during February. The stock has pulled down by more than 10% after releasing its earnings report for the fourth quarter of 2015 on Tuesday, but it's still up by 25% from its lows of the last year. Shake Shack is a particularly volatile stock, and investor sentiment is probably playing a big role in these abrupt price fluctuations. Importantly, short-term volatility can be a source of opportunity for long-term investors in Shake Shack.

Some context
Shake Shack is one of the most dynamic growth stories in the restaurant industry nowadays, and the stock is priced for demanding expectations. In these kinds of companies, investors tend to overreact to short-term information, and this is clearly the case when it comes to Shake Shack stock.

Shake Shack had its IPO in Jan. 2015, with each share priced at $21, and it delivered spectacular returns right out of the gates -- with record highs in the neighborhood of $97 per share by May 2015.

Unfortunately for investors, excessive optimism can lead to big drawdowns once expectations come down to more reasonable levels. Even as Shake Shack has reported solid financial performance over the last several quarters, the stock is now trading in the neighborhood of $37 per share. When it comes to investing in a relatively small and rapidly growing company such as Shake Shack, investors need to be prepared for some nerve-wrecking volatility, since price fluctuations tend to be huge and hard to predict.

What the numbers are saying
The stock may be volatile and unstable, but the business is clearly firing on all cylinders. Shake Shack announced a big increase in revenue of 46.8% during the fourth quarter of 2015, reaching $51.1 million in sales during the period. Same-store sales grew by a vigorous 11%, and restaurant-level operating margin was at 28.2% of revenue, an increase of 590 basis points versus the same quarter in the prior year.

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Performance during the quarter was clearly very strong, but investors were disappointed with management guidance for 2016. The company is expecting revenue to be between $237 million and $242 million during the year, an increase of 24% to 27% versus 2015. Same-store sales are expected to increase between between 2.5% and 3%, a clear deceleration versus growth levels in 2015.

Most operators in the restaurant industry can only envy the kind of performance Shake Shack is expecting to produce in the coming year, but the stock still sold off after the announcement, arguably because investors anticipated even better performance from the company.

This is just the way things work with volatile high-growth stocks. The market can at times overreact to new information, both to the upside and to the downside. The main point to consider is that, as long as the company continues to deliver solid performance, excessive volatility could create a buying opportunity for long-term investors in Shake Shack.

The article Shake Shack Stock Gained 20% in February: What You Need to Know originally appeared on Fool.com.

Andrs Cardenal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.