Starbucks CEO Howard Schultz recently noted during a WYNC interview that Shake Shack Inc. (NYSE: SHAK) is “quite something,” and millions of investors are wondering if they should buy shares as a result.

I wouldn’t.

[ad#Google Adsense 336×280-IA]Not until you can answer one very important question, anyway.

And even then…

Howard Schultz Is Not Warren Buffett

Howard Shultz is no stranger when it comes to being the underdog.

He’s turned Starbucks Corp. (NYSE: SBUX) from the one-room grinding shop in Seattle that I remember from high-school into a global coffee monster with a $78 billion market capitalization and annual revenue of $20.5 billion.

And he’s made plenty of people millionaires along the way.

Starbucks stock has returned 2,426% since its IPO in 1992. That’s enough to turn every $10,000 into $252,600 today. It’s the stuff dreams are made of.

…dreams.

Millions of investors are trying to figure out whether Howard Shultz was just being kind or whether he was trying to impart true wisdom when it comes to Shake Shack… as in, “you should go out and buy shares” wisdom.

I wouldn’t.

Howard Schultz saying he likes Shake Shack is a lot like Warren Buffett saying he likes Coca-Cola… only Schultz does not own Shake Shack, to my knowledge. Buffett owns $160 million worth of Coke stock.

More to the point, what Schultz actually said was that he respects Shake Shack as a competitor because the company is trying to get big, yet stay small… exactly as Starbucks is doing.

The other thing to think about is that Shake Shack still has under 100 locations at a time when Starbucks has more than 24,000 around the world. The former is still built around hype while the latter has become a global tour de force synonymous with innovation, social justice and, yes, profits.

I’d also point out to would-be SHAK investors that, according to SEC filings, Shake Shack CEO Randy Garutti just unloaded 8,000 shares on Sept. 23 in a transaction valued at $258,240. As I have pointed out many times, there could be any number of reasons why he’s sold, ranging from simply wanting to raise cash, to paying for a child’s education – but still – he sold, not bought. And that’s worth noting, just as it was when Schultz, for example, sold $4.5 million worth of Starbucks shares last November.

At the same time, a number of analysts have slapped neutral ratings on SHAK, including JPMorgan Chase and Jefferies Group. Others, like Wedbush Securities and Vetr Inc., have simply rated it a “Sell.”

Me?

I’ve made no bones about my views on Shake Shack.

Among other things, I called it insanely overvalued in May 2015, when the company sported a price/earnings (PE) ratio of 1,285, making it roughly 83 times more expensive than the average stock on the S&P 500.

I still think that’s the case today. Shake Shack is a speculative trade at best. Not an investment.

You don’t need a degree in finance to know that the more overvalued a stock is, the less likely you are to make money from it.

Shake Shack trades at 86 times trailing earnings (meaning those in the past), 62 times forward earnings (meaning those expected in the future), and is priced at 6.35 times book value. It doesn’t pay a dividend. There is no “promise” from management when it comes to rewarding you.

Shake Shack is powered by little more than hope and the “greater fool” theory – meaning you’re hoping that some greater fool is going to come along and pay you more for the stock at a future date than you paid for it today.

Proponents will no doubt take me to task. After all, the company has reported a growing footprint, revenue, and even 195% quarterly earnings growth. Then there’s the fact that it actually does make a “better-burger.”

None of those things, however, merits the tech-like valuation attached to it.

Companies like Shake Shack are fun to talk about because they make for great conversation. They’re new. They’re innovative. And they’re jousting with the establishment – so much so that they’ve caught the attention of another famous one-time underdog, Howard Schultz.

And that brings me to the one question you need to ask yourself if you’re tempted to buy Shake Shack at the moment – are you okay with that?

I’d hate to see you figure out the hard way that you’re speculating when you should be investing.

Building Total Wealth is about sticking with proven players, proven business models, and proven markets – all of which have the potential for huge triple-digit wins at a fraction of the risk inherent in an up and comer like Shake Shack, which isn’t tied into a single one of the Six Unstoppable Trends we follow.

Some of the great examples that come to mind include Raytheon Co. (NYSE: RTN), which has outperformed broader markets by more than 28-to-1 since I brought it to your attention in Total Wealth. Or Kratos Defense & Security Solutions Inc. (Nasdaq: KTOS), which has returned 32% to the Dow’s 1.32% since I recommended it to Total Wealth members as a “must-have” investment perfectly suited for an increasingly volatile world.

And if you’re Jonesing for a fast-food company anyway?

Buy McDonald’s Corp. (NYSE: MCD) instead – that’s a real investment.

Uncle Ronald is trading at 21.92 trailing earnings, 18.7 times forward earnings, and is priced at .74 times book value. Plus it pays a 3.1% dividend.

What’s more, McDonald’s generated $6.32 billion more in cash flow than it needed last year and has returned $9.4 billion to investors over the same time frame.

With more than 36,000 locations and a 19% profit margin, it’s got the stamina to survive – and I’m not so sure you can say that about Shake Shack if the stuff really hits the fan.

Want fries with that?

— Keith Fitz-Gerald

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Source: Money Morning