The S&P 500 has exhibited strong performance, increasing approximately 20% over the last year. However, Cava Group’s stock price has outperformed significantly, rallying 160% in the same period. This notable share price increase presents various considerations for investors deciding whether to buy, sell, or hold shares in this emerging restaurant concept.
Reasons to Buy Cava Group
Cava operates as a Mediterranean-themed restaurant using an assembly line-style food preparation system. The food is cooked behind the counter, ensuring customers receive freshly made meals. This setup allows customers to customize their orders to their taste. This model is similar to that of Chipotle Mexican Grill, which has expanded considerably over the years, achieving significant investor gains despite recent price fluctuations.
Chipotle’s shares have surged 340% over the past decade, compared to a roughly 190% increase in the S&P 500 index. Investors are optimistic that Cava could become the next Chipotle, particularly as Cava operated around 350 restaurants by the end of the third quarter of 2024, whereas Chipotle operates more than 3,700. With same-store sales increasing by 18% in the third quarter of 2024, Cava’s growth potential appears strong. Therefore, buying Cava stock may be appealing if investors believe in the company’s potential for aggressive expansion and significant long-term results.
Reasons to Sell or Avoid Cava
Despite its promising growth, Cava’s stock price has factored in much of the positive outlook, as evidenced by the substantial price increase over the past year and its high price-to-earnings (P/E) ratio. Chipotle’s P/E is around 50x, which is lower than Cava’s P/E of over 300x. In contrast, the S&P 500’s average P/E is 23.
Cava might continue to expand rapidly, but any signs of weakness could prompt investors to sell due to its high valuation. The stock could fall despite positive company performance if momentum-driven investors shift their focus elsewhere. Therefore, those cautious about valuation might choose not to buy Cava, and current shareholders may consider selling to realize profits. Stocks rarely sustain such high P/E ratios for extended periods, often adjusting due to price declines.
Considerations for Holding Cava
Despite Cava’s expensive stock, the growth opportunity is substantial and management appears to be executing effectively by opening new locations and maintaining high sales levels at existing ones. If Cava continues to appeal to customers, it could potentially grow into its current high valuation.
Shareholders choosing to hold should monitor same-store sales closely, as sustaining the current 18% growth rate indefinitely may be challenging. A performance half that level would still stand out in an industry where low single-digit growth is considered solid. Quick reactions may be necessary if investor perceptions change, given the optimism currently reflected in the stock price.
Alternatively, shareholders could simply maintain their position. Chipotle, as illustrated in its long-term chart, has experienced substantial price drawdowns, yet has been a wealth-building investment over time. Enduring such volatility with Cava will require strong belief in the business model.
Cava for Aggressive Growth Investors
Cava is not ideal for value investors due to its high valuation or for income investors because it does not offer dividends. It may appeal to growth investors, although its extreme valuation remains a concern. Therefore, the company is better suited for aggressive growth investors prepared for potential share price turbulence and enthusiastic about its strong market momentum.
