Dynamic Marketing Communiqué

Activist investors can help you find great stocks to invest in. Learn why here! [Wednesday: The Independent Investor]

December 26, 2023

Miles Everson’s The Business Builder Daily speaks to the heart of what great marketers, business leaders, and other professionals need to succeed in advertising, communications, managing their investments, career strategy, and more.

A Note from Miles Everson:

Happy midweek!

We’re excited to share another investing insight in today’s “The Independent Investor.” 

Every Wednesday, we publish articles focusing on investment tips and strategies in the hopes of helping our readers achieve true financial freedom. 

For today’s article, we’ll highlight an investing insight that can serve as a guide for your future moves in the market.  

Are you ready to learn about today’s topic? 

Keep reading below to know more!

Miles Everson
CEO, MBO Partners
Chairman of the Advisory Board, The I Institute

The Independent Investor

In May 2023, hedge fund Engaged Capital announced its activist stake in beloved burger chain Shake Shack.

The immensely popular restaurant chain is known for its delicious burgers and other menu offerings.

So, why did Engaged Capital take a sizable position in Shake Shack?

To answer that question, it’s important to understand what activist investing is first.

Activist investing involves the acquisition of a significant stake in a publicly traded company to influence how it is run.

Investors who take an “activist” position in a company usually do this to change how a firm is run for the purpose of attaining better shareholder value and financial performance. Achieving those objectives may come in the form of advising management, forcing the sale of a firm, or replacing a business’ board of directors.

In the case of Engaged Capital, it doesn’t invest in companies and wait for share prices to rise. Instead, the hedge fund works with firms to improve their businesses, unlocking the stock’s value faster. 

Circling back to Shake Shack, the fast food chain saw a massive dip in its Uniform return on assets (ROA) in 2020, which continued to persist until this year.

Wall Street analysts and the rest of the market think that Shake Shack will continue to struggle, with the belief that the company’s Uniform ROA will hover around 0% for the next 2 years due to this massive decline in ROA.

If Wall Street analysts and the rest of the market are right about their expectations, then this would mean a decline in the value of Shake Shack’s shares.

Chart from Altimetry

So, why did Engaged Capital invest in a company that the market expects to struggle?

The answer is simple: The first step to stock picking isn’t deciding what you think the company can do since it’s about understanding what the market expects that firm to do and deciding if you agree.

In this scenario, it’s clear that Engaged Capital doesn’t agree with the rest of the market and its expectations for Shake Shack. 

It’s reasonable to assume that the hedge fund thinks it can get Shake Shack back on track and push the company toward higher earnings, giving its stock the chance to beat investor expectations.

To achieve that goal, Engaged Capital worked with the fast food chain to improve its digital presence and cut down on costs.

Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research suspects that the hedge fund is focusing its efforts towards helping Shake Shack attain comparable profitability among its peers.

For those who don’t know, Shake Shack’s business model is a bit of an oddity compared to its rivals because around half of its stores are fully owned and the other half are franchises.

On the other hand, the fast food chain’s competitors either fully own their stores or operate on a franchising business model.

While either ownership model can be successful, Professor Litman said he wouldn’t be surprised if Engaged Capital pushed Shake Shack to choose one ownership model moving forward.

This is because if the fast food chain starts to operate like its peers, it can significantly exceed market expectations.

The key to picking stocks is understanding a market’s expectations about a specific company and deciding whether you agree with the assessment or not.

In the case of Engaged Capital, it saw an investment opportunity in Shake Shack because the market was undervaluing the burger chain. 

By taking an activist stake in Shake Shack, Engaged Capital wants to help the company beat market expectations and receive higher returns as a result.

We hope you learned a lot from today’s “The Independent Investor!”

Remember: Activist investors can significantly impact the trajectory of underperforming companies. By keeping track of the companies they’re investing in, you’ll be able to spot opportunities that will benefit the performance of your investment portfolio.

(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)

About The Dynamic Marketing Communiqué’s
“Wednesdays: The Independent Investor”

To best understand a firm, it makes sense to know its underlying earning power. 

In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times. 


Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept. 

Every Wednesday, we’ll publish investing tips and insights in accordance with the practices of some of the world’s greatest investors. 

We make certain that these articles help you identify and separate the best companies from the worst, and develop your investing prowess in the long run. 

Our goal? 

To help you get on that path towards the greatest value creation in investing. 

Hope you’ve found this week’s insights interesting and helpful.

Stay tuned for next Wednesday’s “The Independent Investor!”


Kyle Yu
Head of Marketing
Valens Dynamic Marketing Capabilities
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