The S&P 500 has risen about 20% over the past 12 months, which is a very strong performance. Cava Group's (CAVA 0.91%) stock price has rallied 160% over the same span. There's a lot to digest about that eye-popping share price advance when you consider the buy, sell, or hold call on this upstart restaurant concept.
Buy Cava Group
Let's start with the good news: Cava is a Mediterranean-themed restaurant that uses an assembly line-style preparation system. It cooks the food in a kitchen behind the counter, so customers know it is freshly made. And the assembly line allows customers to fine-tune their choice to their specific taste preferences.
This is, basically, what Chipotle Mexican Grill does, too, only with a Mexican theme. Chipotle has grown massively over the years and, despite some recent price weakness, has been a huge winner for investors.
To put a number on that, Chipotle's shares have risen 340% over the past decade, while the S&P 500 index has risen around 190%. Investors are betting that Cava is the next Chipotle. And there's good reason to think that, given that Cava only operated around 350 restaurants at the end of the third quarter of 2024.
Chipotle operates more than 3,700 restaurants. If Cava's concept remains attractive to consumers, there could be a huge growth opportunity ahead. With same-store sales of 18% in the third quarter of 2024, the concept does, indeed, appear to be very hot right now.
So the reason to buy Cava is that you believe it can continue to expand aggressively, perhaps achieving similar long-term results to Chipotle.
Sell (or avoid) Cava
The problem here is that investors are already pricing a lot of good news into Cava's stock price. That massive price advance over the past 12 months is the first indication of this fact, but there's also the price-to-earnings ratio.
Chipotle has a P/E of roughly 50x. That's very high, but it actually pales in comparison to Cava's over 300x P/E ratio. For comparison, the S&P 500's average P/E is 23.
NYSE: CAVA
Key Data Points
It is entirely possible that Cava will continue to grow its business at a breakneck pace. But even the slightest sign of weakness could lead investors to dump the stock, given the lofty valuation. In fact, the company could continue to perform strongly, and the stock could still fall if momentum-driven investors decide to move on to another story stock.
If valuation matters to you, you won't want to buy Cava. And if you own it, you might want to consider taking some profits. It is unusual for stocks to have P/Es as high as Cava's for long periods of time, with stock price declines a frequent reason for the P/E falling back to lower levels.
Hold Cava
That said, if you own Cava, it might be hard to justify selling it. While the stock is expensive, the opportunity remains robust. And management is executing very well right now, aggressively opening new locations while, at the same time, keeping sales at existing locations high. If the restaurant chain can continue to resonate with customers, there's no reason to believe it won't grow into that lofty P/E ratio.
If you decide to stick it out, however, make sure to track same-store sales closely. It is unlikely that Cava will be able to sustain 18% forever. But even if it can manage to achieve half that level, it will be a standout performance in an industry where low single digits are considered a solid outcome. The big takeaway, however, is that you may need to react quickly if the story changes, given the good news that investors have already priced into the shares.
Or you could just hold on and not do anything. As the chart shows, Chipotle has suffered through a few massive drawdowns even as it has helped investors build wealth over the long term. It would have taken an iron stomach to sit through multiple 50%-plus stock price declines, but such drops aren't uncommon when you are looking at young, fast-growing companies. To stick it out with Cava through this kind of volatility, however, you'll want to make sure you really (really!) believe in the strength of its food concept.
Cava is for aggressive growth investors
Value investors won't like Cava, given its lofty valuation. Income investors won't like Cava since it doesn't pay a dividend. Growth investors are the group that may like this stock. But even then, there's the valuation to contend with, which is extreme by just about any measure.
So really, Cava is most appropriate for aggressive growth investors. And even then there's a bit of buyer beware, since the market is clearly highly enthusiastic about the stock today. Share price turbulence is highly likely.
