Over the past year, the S&P 500 has experienced a 20% increase, marking a strong performance. During the same period, Cava Group’s stock has surged by 160%. This significant rise in share price prompts analysis regarding whether to buy, sell, or hold this emerging restaurant concept.
Reasons to Buy Cava Group
Cava Group, a restaurant with a Mediterranean theme, employs an assembly line-style preparation method. This system, where food is prepared in a kitchen behind the counter, assures customers of freshly made meals. Customers can customize their choices according to their preferences, akin to Chipotle Mexican Grill’s method, which follows a Mexican theme. Despite some recent challenges, Chipotle has historically been a successful investment, with its shares rising by 340% over the past decade compared to a 190% increase in the S&P 500 index. Investors speculate that Cava could mirror Chipotle’s success. By the end of the third quarter of 2024, Cava operated approximately 350 restaurants, whereas Chipotle had over 3,700 locations. If Cava continues to appeal to consumers, it holds a substantial growth opportunity, as evidenced by its 18% same-store sales growth in the third quarter of 2024. Thus, those considering purchasing Cava stock believe in its potential for aggressive expansion, possibly yielding similar long-term outcomes to Chipotle.
Reasons to Sell or Avoid Cava
Investors have already factored in significant positive expectations into Cava’s stock price, evident from the dramatic price increase over the past year and its high price-to-earnings (P/E) ratio. While Chipotle has a P/E ratio around 50x, Cava’s exceeds 300x, contrasted with the S&P 500’s average P/E of 23. Although Cava may continue growing at an accelerated pace, any sign of weakness could prompt investors to divest, given the stock’s high valuation. Even with the company performing well, the stock could still decline if momentum-driven investors shift to another high-interest stock. For those focused on valuation, avoiding or profiting from existing Cava investments might be advisable, as such high P/E ratios are uncommon for extended durations, often resulting in price declines when P/E falls to more typical levels.
Reasons to Hold Cava
Current Cava shareholders might find it difficult to justify selling despite the high stock price, given the promising opportunities still available. The management is currently executing strategies effectively, expanding locations and maintaining high sales in existing ones. If the restaurant chain continues to attract consumers, it could eventually justify its high P/E valuation. For those opting to hold, monitoring same-store sales closely is essential, as sustaining the current 18% growth may not be feasible forever. However, even achieving half this rate would be notable in an industry where low single-digit growth is often deemed successful. Reacting quickly to any changes in the narrative is crucial since positive developments are already reflected in the share prices. Alternatively, holding on without action might be viable, drawing parallels to Chipotle’s experience, which, despite major stock declines, has historically generated wealth for investors. Is navigating such volatility worth it for Cava? It will depend on the investor’s belief in the strength of its food concept.
Cava and Aggressive Growth Investors
Cava’s high valuation might deter value investors, and its lack of dividend payments is unappealing to income-focused investors. Growth investors might find the stock appealing, though its extreme valuation presents challenges. Consequently, Cava is more suitable for aggressive growth investors, albeit with caution given the current market enthusiasm, which suggests potential for significant share price volatility.
