We recently compiled a list of the Top 10 Holdings of Engaged Capital. In this article, we are going to take a look at where Shake Shack Inc. (NYSE:SHAK) stands against Engaged Capital’s other top holdings.
Engaged Capital was one of the hedge funds that roared back to life as activist investors enjoyed one of the best runs in the market. With the S&P 500 rallying by 24% in 2023, the hedge fund found itself in one of the best spots owing to savvy stock picking. A 29% gain by the hedge was much better than the average 16% loss registered by most hedge funds in 2022 as the market came under pressure amid heightened inflation.
Founded in 2012 by veteran investor Glenn W. Welling, Engaged Capital is one of the most revered activist hedge funds that push for strategic changes in companies. Having launched with an initial capital of $85 million, it has become one of the biggest, controlling a portfolio worth $617.1 million. It has grown to become an experienced small-cap hedge fund that makes investments with a two to five-year investment horizon.
Welling is best known for his stock picking skills, having accrued significant skills on starting his career at the renowned activist fund Relational Investors led by Ralph V Whitworth in 2008. He was the principal and managing director at the hedge fund responsible for consumer, healthcare, and utility group investments.
While the top 10 holdings of Engaged Capital are public equities with a market cap of $300 million to $8 billion, they are usually spread in specific industries. For instance, it is not fond of investment opportunities in commodity sectors such as utilities, energy, and financials. The hedge fund also avoids companies with two share classes and those with more than 20% insider ownership, as it makes pushing for successful activist campaigns challenging.
Engaged Capital primarily focuses on companies that excel in their industries, show strong profitability, produce solid cash inflows, and maintain a low debt ratio. The activist hedge fund investigates further to uncover the causes of the stock’s poor performance. It also examines the financial data to pinpoint areas needing improvement to alter how the market views the company and then discusses the company’s management structure to gauge the feelings of the shareholders, indicating if there’s interest among other investors in making changes.
As part of its activist campaigns, Engaged Capital always pushes for operational improvements, including cutting costs to generate optimum shareholder value. In some cases, it advocates for strategic reviews that include selling non-core assets or the entire business if it’s the only option left to generate value. Board refreshment, including pushing for seats on the board, is also part of the strategy that the hedge fund deploys to try and advocate for change and influence a company’s direction to unlock any hidden value.
Engaged Capital is not the only hedge fund pushing for changes in corporations in a bid to unlock shareholders in 2024. With activist investors generating an average return of 20.2% in 2023, there has been an inflow of Capital into various equities. Investors look for ways to unlock additional value when the equity market continues making higher highs amid the high interest rates environment.
Engaged Capital and other activists are expected to continue advocating for strategic changes as the high interest rate environment dampens expansion while affecting certain businesses. According to lawyers, bankers, and hedge fund executives, investors are expected to demand more from companies for transformation.
Some investors have expressed their readiness to invest additional funds as activists believe returns will continue to be strong with an increase in merger and acquisition activity. In the previous year, a record 77 first-time activists launched campaigns, a significant rise from 55 the previous year, according to Lazard data.
Our Methodology
Activist investment has roared back to life after the double-digit percentage gains in 2023 as the equity markets rallied to record highs. In this article, we have compiled the top 10 holdings of Engaged Capital, a hedge fund that is making a mark through activist investment. After analyzing Insider Monkey Database we have compiled Engaged Capital’s top ten holdings and ranked them based on the hedge fund’s equity stakes.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A cook in a busy kitchen preparing a delicious cooking of burgers and fries.
Shake Shack Inc. (NYSE:SHAK)
Engaged Capital’s Equity Stakes: $80.60 Million
Number of Hedge Fund Holders: 34
Following the acquisition of a 6.6% stake in the first half of 2023, Shake Shack Inc. (NYSE:SHAK) became one of the top 10 holdings of Engaged Capital, emerging as it is the biggest holding in the Consumer Cyclical sector. Following the acquisition, the stock ended up doubling in value.
The rally came as Engaged Capital embarked on a proxy fight that involved pushing for three board seats and other changes to boost the stock price. At the start of 2024, Shake Shack Inc. (NYSE:SHAK) was up by more than 130% over the past 12 months, attributed to investors reacting to a return to profitability and sales growth. Shake Shack Inc. (NYSE:SHAK) delivered a profit of $16.2 million in 2023, an improvement from a net loss between 2020 and 2022, hurt by the pandemic slowdown.
An analysis of the Insider Monkey Database indicates that hedge funds have been building up stakes in Shake Shack Inc. (NYSE:SHAK). As of the end of the first quarter, 34 hedge funds out of 920 tracked held stakes in the company, an improvement from 28 as of the end of 2023.
Here is what Alger Small Cap Growth Fund said about Shake Shack Inc. (NYSE:SHAK) in its first quarter 2024 investor letter:
“Shake Shack Inc. (NYSE:SHAK) is an elevated take on classic American cuisine. The company uses high-quality ingredients to craft Angus beef burgers, crinkle-cut fries, crispy chicken, and hot dogs. The company serves a full complement of beverages including house- made lemonade, hand-spun milkshakes, beer, wine, and soft drinks. During the quarter, shares contributed to performance after the company reported strong fiscal fourth quarter results, where earnings beat analyst estimates due to increasing restaurant level operating margins and strong same store sales above consensus, driven by better price mix and increased traffic. Moreover, management gave initial 2024 guidance with revenues in-line with consensus but higher-than-expected earnings, underscoring the company’s recent focus on streamlining operations by leveraging technology investment. Separately, following their fiscal fourth quarter earnings report, Shake Shack announced Rob Lynch as the incoming CEO. effective May 2024, succeeding Randy Garutti upon his retirement. Lynch, the former CEO of Papa John’s, is credited with revitalizing the brand post-2018 and has held senior marketing positions at several other top restaurant chains. With management executing well on its expansion plan to add 80 new restaurants in 2024, many of which with newly implemented drive-through windows, we believe the company remains well positioned for long-term growth potential.”
Overall SHAK ranks 3rd on our list of Engaged Capital’s top 10 holdings. You can visit Top 10 Holdings of Engaged Capital to see the other stocks that are on hedge funds’ radar. While we acknowledge the potential of SHAK as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SHAK but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.