Over the last year, the S&P 500 has seen about a 20% surge, highlighting its robust performance. Yet, in the same timeframe, Cava Group’s stock has surged an astonishing 160%. This striking uptick in share price demands careful consideration for those contemplating a buy, sell, or hold decision on this emerging restaurant brand.
### Reasons to Consider Buying Cava Group
To kick things off on a positive note: Cava is a growing Mediterranean-style restaurant chain employing an assembly line-style setup. The food is freshly prepared in a visible kitchen setting, allowing customers to customize their meals according to their preferences. This business model is reminiscent of what Chipotle Mexican Grill has championed, albeit with a Mexican theme. Chipotle has seen significant expansion over time and despite its recent stock price fluctuations, loyal investors have reaped rewards.
To put it in numbers, Chipotle’s shares have soared 340% over the past decade, in contrast to the S&P 500’s 190% increase. Many investors view Cava as the next big player, akin to Chipotle. This perspective is supported by the fact that Cava operated around 350 restaurants by the end of the third quarter in 2024.
Compared to Chipotle’s over 3,700 locations, if Cava’s unique appeal remains strong, there’s a vast growth opportunity looming. The concept’s current popularity is underlined by same-store sales growth of 18% reported in the third quarter of 2024. Thus, investing in Cava hinges on the belief in its potential for rapid expansion, mirroring Chipotle’s success.
### Why You Might Want to Sell or Avoid Cava
The flip side of the coin reveals that Cava’s stock price already factors in a lot of optimism. The impressive rise over the last year is just one sign of this, but another significant indicator is the price-to-earnings (P/E) ratio. While Chipotle’s P/E ratio hovers around 50, Cava’s is over a staggering 300, dwarfing the S&P 500’s average P/E of 23.
True, Cava might keep up its blistering pace of growth. However, any hint of underperformance could prompt a swift sell-off by investors, wary of the high valuation. Remarkably, even if Cava continues to deliver solid results, a downturn in its stock might occur if momentum-driven traders shift their focus to another rising star.
For those who prioritize valuation, Cava might not seem appealing. If you currently hold the stock, it could be wise to lock in some profits. Historically, such high P/E ratios are rare for extended periods, often reducing as stock prices decline.
### Hold Position on Cava
Yet, there’s a case for holding onto Cava. Despite its pricey stock, the growth potential is tangible, backed by adept management opening new sites while maintaining robust sales at existing ones. Should the brand’s appeal endure, Cava could very well grow into its formidable P/E ratio.
For those committed to holding, monitoring same-store sales is critical. Sustaining 18% growth is ambitious, yet even achieving half would be impressive in a sector where low single-digit growth is commendable. However, given the current optimism revealed in share prices, one must stay agile in the face of changing narratives.
Alternatively, you might simply ride out the waves. History shows Chipotle has weathered several significant downturns while providing substantial returns over time. Surviving multiple 50%-plus price slumps in high-growth companies demands steadiness. Hanging on through similar volatility with Cava means you must decisively believe in its culinary appeal and growth prospects.
### Cava: Suitable for Aggressive Growth Investors
Those seeking value or income won’t find it in Cava — its high valuation and lack of dividends don’t cater to these investors. However, growth-oriented investors might find it intriguing, provided they can handle a steep valuation. Ultimately, Cava suits the aggressive growth investor best. Even then, a degree of caution is warranted, as the market’s current enthusiasm could lead to price instability.
