Finding a stock that will "set you for life" is a process that is often difficult and elusive for seasoned investors. Such a process typically involves a company offering consumers and businesses something that did not previously exist, or a game-changing new approach to an existing product or service.
Moreover, a changing marketplace or poor management can derail a promising investment prospect, and even the highest-quality stocks experience periodic sell-offs that can wipe out 50% or more of a stock's value. Such pitfalls often tempt shareholders to exit their positions.
Still, if investors can account for those factors, they might find a stock that sets them for life. One excellent prospect for such long-term gains is Mediterranean fast-casual restaurant chain Cava Group (CAVA 0.88%), and here's why.
Image source: Cava Group.
The case for Cava Group
Admittedly, the choice of Cava Group may seem counterintuitive. The restaurant industry is highly competitive, and the uncertain economy has impacted even the most successful restaurant chains, such as Chipotle.
Even more concerning, considering that Chipotle's Mexican cuisine is objectively more popular than Mediterranean food, this might bode poorly for Cava.
However, both the government and consumers have focused more on healthy food recently. One of the more popular approaches has been the so-called Mediterranean diet, which has likely played into Cava's hands.
Additionally, Chipotle paved the way for a successful fast casual chain serving healthy food, and Cava has taken a similar approach with a different food type. That makes Chipotle a more indirect competitor, making it more likely Cava will face less competitive blowback with its business strategy.
Furthermore, investors looking for stocks to "set them up for life" often want to buy smaller stocks on track to become large-cap stocks. At a market cap of around $7.7 billion, Cava is considerably smaller than Chipotle at $56 billion or McDonald's at $224 billion.
The size of each business reflects those market caps. As of the end of the second quarter of fiscal 2025 (ended July 13), Cava had expanded to 398 locations. That is far smaller than Chipotle's, which now has a footprint exceeding 3,800 restaurants, and a tiny fraction of the size of McDonald's, a chain with more than 44,000 restaurants.
Nonetheless, the histories of these peers hint at how far Cava could grow, and the company has set a goal of reaching 1,000 locations by 2032. As Mediterranean foods become more popular, it could raise that target number by seeking opportunities in smaller U.S. markets or abroad, dramatically increasing the growth potential of Cava stock.
What its numbers say
The company's financials continue to affirm this growth. In the first 28 weeks of fiscal 2025, Cava earned more than $612 million in revenue, a 24% increase from the same period in fiscal 2024. That included a 17% increase in the number of restaurants.
Also, while Cava is not immune to an economic slowdown, same restaurant sales rose 11% in fiscal Q1 but dropped to 2% in fiscal Q2. Still, the forecast 4% to 6% same-restaurant sales increase is above the flat comparable store sales predicted by Chipotle this year, pointing to the growing popularity of its food type and the Cava brand.
Moreover, Cava kept operating expense growth below the increase in revenue. Consequently, its net income for the first 28 weeks of the fiscal year was just over $44 million, a 31% yearly surge.
Despite such gains, the stock has retreated from its previous high valuation. It is down by about 60% since its peak last December. The P/E ratio is 56, and that may prompt investors to question whether the stock remains overpriced. Still, such valuations were normal for Chipotle until its recent pullback, indicating Cava stock could be at a level where investors are willing to bid it higher again.
Consider Cava Group stock
Cava Group stock is likely a buy because it follows Chipotle's formula for fast casual success in an increasingly popular food type.
The consumer discretionary stock has fallen recently, probably due to a slowing economy affecting Cava's sales growth and valuation. Investors should also note that the P/E ratio is 56 after the stock's dramatic pullback.
However, the 60% pullback in the stock price gives Cava a valuation comparable to Chipotle's in earlier years, and growth continues amid the struggles. As Cava Group continues on its path to 1,000 restaurants, investors may just be beginning to set themselves up for life as the company capitalizes on an increasingly popular food trend.
