This post is part of the On the Margin blog.
Late afternoon on Wednesday, Shake Shack Inc. announced that it priced its secondary offering at $60 per share. Mere minutes before that, its stock closed trading for the day at $64.79.
That’s a steep discount for a secondary offering. And investors today have reacted, first by sending shares down 9 percent in morning trading to just below that $60 price, then later even further. By the end of trading its shares had fallen 16 percent to less than $55.
Secondary offerings can sometimes drive down the price of a company’s stock, because of simple supply and demand. More stock available for trade means a higher supply, which often brings down the price.
In November, El Pollo Loco had a secondary offering with discounted shares at $27, lower than the previous closing price, sending its stock down more than 3 percent the next day.
Similarly, a secondary offering at Noodles & Company at $39.50, which was not discounted, nevertheless sent shares down 4.5 percent the next day.
The stock prices at both chains have gone down ever since, by the way.
But not all secondary offerings yield such results. The stock price at Zoe’s Kitchen actually increased slightly the day after it priced its secondary offering in November. That secondary was priced at $32.
Its shares have continued to go up as the chain has performed up to expectations. Zoe’s closed today at more than $42.
The bigger concern at Shake Shack is simply its valuation. Shake Shack trades at more than 200 times its forward earnings, making it by far the most expensive stock in the restaurant business. A number of analysts have expressed concerns recently about the chain’s valuation.
And plenty of investors believe that, too. According to Nasdaq data, more than 40 percent of Shake Shack’s “float” is short — meaning that four out of every 10 shares available for trade are being shorted, or sold by those speculating that the stock price will fall. That’s a big percentage.
By comparison, 6.8 percent of Chipotle shares are being shorted. Only 1.4 percent of shares at struggling McDonald’s Corp. are short.