The S&P 500 has risen about 20% over the past 12 months, which is a very strong performance. Cava Group‘s (NYSE: CAVA) 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.
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.
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.
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.
