Why Shorts Are Dead Wrong About These 2 Stocks (and Right About This 1)

SeaWorld Entertainment Inc (NYSE:SEAS)

Shares Being Shorted (as of April 30): 23.98 million

Percentage of Float Being Shorted: 37.4%

Days to Cover Shorts (Based on Average Daily Trading Volume): 18

Bear Thesis on SeaWorld Entertainment Inc (NYSE:SEAS): Negative publicity of SeaWorld reached a feverish pitch in 2013 with the release of the documentary Blackfish, which criticized the theme park’s capture and handling of killer whales. Short sellers of the stock believe that the company will not be able to restore the public’s perception of it and that attendance and revenue will continue to decline.

Why the Bears Are Wrong: The shorts are starting to feel the heat on this one, as SeaWorld shares have gained over 50% since touching an all-time low last November. Attendance jumped in the first-quarter by 15% year-over-year, while revenue rose by 16.5% as the company’s new attractions appear to be gaining traction with visitors.

Rather than hide from or skirt around the controversies that have dogged it in recent years, as shorts may have been banking on, SeaWorld has instead used the opportunity to do a little soul searching and change its messaging as well as completely overhaul the content of its shows. While the results have been slow to take root, SeaWorld Entertainment Inc (NYSE:SEAS) appears to be on the right track. Aggressive new pricing and marketing strategies have also helped spur a renewed interest in the park.

As rapidly as public perception can turn against a company, it can just as quickly do the opposite. And as with all controversies, they eventually fade from public view. While Blackfish may continue to haunt SeaWorld to some extent for a little while longer, any threat of it being the company’s death knell have passed, and its influence will only continue to wane as SeaWorld transitions further and further away from killer whales as the backbone of its attractions.

Shake Shack Inc (NYSE:SHAK)

Shares Being Shorted (as of April 30): 7.78 million

Percentage of Float Being Shorted: 32.2%

Days to Cover Shorts (Based on Average Daily Trading Volume): 14

Bear Thesis on Shake Shack Inc (NYSE:SHAK): Bears don’t understand what all the fuss is about. After all, Shake Shack is just a burger joint in a world where McDonald’s Corporation (NYSE:MCD) exists. They groan when people talk about its growth rate compared to other restaurants, restaurants which have been around for a million years already (give or take a few hundred thousand). And they get light-headed when thinking about the company’s sky-high valuation.

Why the Bears Are Right: This is another stock that’s hurt bears in a big way this year, but unlike SeaWorld, which has risen into fair valuation territory, Shake Shack continues to push into nosebleed territory. Shake Shack is now valued at over $2 billion after 33% gains this year. That’s the same market cap as GameStop, despite the company pulling in 1/24 the revenue that GameStop did last year.

Yes, there’s a growth story here, which included opening a net total of 45 new locations in 2017, not just in the U.S, but in Japan, the U.K, and the Middle East as well. All told, the company is aiming to have 450 locations at some point in the not-too-distant future. Far less impressive was the company’s same-store sales decline of 1.2% (though that figure did rise by a modest 1.7% in the first-quarter of this year) and its operating income of less than $34 million (shares trade at 63x that figure).

Of course, we know that the markets don’t always react rationally when it comes to growth stocks (or ever for that matter), so trying to short them is always a risky endeavor. Nonetheless, while it might not be in a year, as of right now the data says this is an overvalued stock.

Disclosure: None