The S&P 500 has risen about 20% over the previous 12 months, which is a really sturdy efficiency. Cava Group‘s (CAVA -9.00%) inventory worth has rallied 160% over the identical span. There’s quite a bit to digest about that eye-popping share worth advance when you think about the purchase, promote, or maintain name on this upstart restaurant idea.
Purchase Cava Group
Let’s begin with the excellent news: Cava is a Mediterranean-themed restaurant that makes use of an meeting line-style preparation system. It cooks the meals in a kitchen behind the counter, so prospects know it’s freshly made. And the meeting line permits prospects to fine-tune their option to their particular style preferences.
That is, mainly, what Chipotle Mexican Grill does, too, solely with a Mexican theme. Chipotle has grown massively through the years and, regardless of some latest worth weak spot, has been an enormous winner for traders.
To place a quantity on that, Chipotle’s shares have risen 340% over the previous decade, whereas the S&P 500 index has risen round 190%. Traders are betting that Cava is the subsequent Chipotle. And there is good motive to assume that, provided that Cava solely operated round 350 eating places on the finish of the third quarter of 2024.
Chipotle operates greater than 3,700 eating places. If Cava’s idea stays engaging to shoppers, there may very well be an enormous progress alternative forward. With same-store gross sales of 18% within the third quarter of 2024, the idea does, certainly, look like extremely popular proper now.
So the explanation to purchase Cava is that you just imagine it will probably proceed to broaden aggressively, maybe attaining comparable long-term outcomes to Chipotle.
Promote (or keep away from) Cava
The issue right here is that traders are already pricing plenty of excellent news into Cava’s inventory worth. That large worth advance over the previous 12 months is the primary indication of this truth, however there’s additionally the price-to-earnings ratio.
Chipotle has a P/E of roughly 50x. That is very excessive, however it truly pales compared to Cava’s over 300x P/E ratio. For comparability, the S&P 500’s common P/E is 23.
It’s solely potential that Cava will proceed to develop its enterprise at a breakneck tempo. However even the slightest signal of weak spot could lead on traders to dump the inventory, given the lofty valuation. Actually, the corporate may proceed to carry out strongly, and the inventory may nonetheless fall if momentum-driven traders determine to maneuver on to a different story inventory.
If valuation issues to you, you will not wish to purchase Cava. And if you happen to personal it, you may wish to take into account taking some income. It’s uncommon for shares to have P/Es as excessive as Cava’s for lengthy intervals of time, with inventory worth declines a frequent motive for the P/E falling again to decrease ranges.
Maintain Cava
That stated, if you happen to personal Cava, it is likely to be exhausting to justify promoting it. Whereas the inventory is pricey, the chance stays strong. And administration is executing very effectively proper now, aggressively opening new areas whereas, on the similar time, protecting gross sales at present areas excessive. If the restaurant chain can proceed to resonate with prospects, there isn’t any motive to imagine it will not develop into that lofty P/E ratio.
In the event you determine to stay it out, nonetheless, ensure that to trace same-store gross sales intently. It’s unlikely that Cava will be capable of maintain 18% eternally. However even when it will probably handle to realize half that degree, it will likely be a standout efficiency in an trade the place low single digits are thought-about a strong end result. The large takeaway, nonetheless, is that you could be have to react shortly if the story modifications, given the excellent news that traders have already priced into the shares.
Or you can simply maintain on and never do something. Because the chart reveals, Chipotle has suffered via a couple of large drawdowns even because it has helped traders construct wealth over the long run. It could have taken an iron abdomen to take a seat via a number of 50%-plus inventory worth declines, however such drops aren’t unusual when you’re taking a look at younger, fast-growing corporations. To stay it out with Cava via this type of volatility, nonetheless, you will wish to be sure you actually (actually!) imagine within the power of its meals idea.
Cava is for aggressive progress traders
Worth traders will not like Cava, given its lofty valuation. Earnings traders will not like Cava because it would not pay a dividend. Development traders are the group which will like this inventory. However even then, there’s the valuation to cope with, which is excessive by nearly any measure.
So actually, Cava is most acceptable for aggressive progress traders. And even then there is a little bit of purchaser beware, because the market is clearly extremely enthusiastic concerning the inventory at present. Share worth turbulence is extremely doubtless.
