Cava Group (CAVA -2.09%) stock jumped 20% in January, according to data from S&P Global Market Intelligence. There was no news specific to the company, but investors have been enthusiastic about the economy and the markets since Donald Trump took office two weeks ago. Cava stock had also dipped in December, and investors may have spotted an opportunity.
Why investors love Cava stock
Cava looks like a no-brainer business that's going to excel over the long term. It operates a chain of fast-casual restaurants with a Mediterranean spin, featuring a limited number of healthy, premium ingredients that can easily create several custom dishes. Where have I heard that concept before? Oh, yeah, it's a rerun of the Chipotle Mexican Grill concept, with falafel instead of burritos. But Cava is just getting started, with just over 350 stores, in comparison with Chipotle's more than 3,500 stores. Management sees the opportunity for about 1,000 stores by 2032. Considering how well Chipotle has done, and what they perceive as Cava's opportunity, investors are hungry for some Cava today.
There are strong reasons for that confidence. Cava has been demonstrating robust performance, and the future looks as bright as a Mediterranean sun. In the 2024 third quarter, sales were up 39%, driven by new stores and same-store sales growth. Same-store sales increased 18% year over year, which is a phenomenal showing in the restaurant industry today. Restaurant-level profit margin moved up from 25.1% to 25.6%. It was an excellent quarter, and management revised its guidance higher after the report.
As it scales successfully, it is also becoming highly profitable. Net income increased from $6.8 million in 2023 to $18 million in 2024 in the third quarter, and it generated $23.4 million in free cash flow.
Cava recently launched a new membership program that should build its brand, generate loyalty, and result in higher sales.
There's one major flaw in the investing thesis
The market is looking somewhat inflated right now. The high valuations are starting to look like how the bull market was before it crashed in 2022, and Cava fits right in there.
Cava stock trades at a P/E ratio of 309, which is just astronomical, especially for a product-based, non-tech stock. It trades at a PEG ratio of 0.4, which suggests that on an earnings-growth basis, it could still be undervalued. But I'd be wary of investing in a stock so highly valued right now, even one with an underlying healthy business, especially since it has a short track record.
