this S&P 500 Over the past 12 months, it has increased by about 20%, which is a very strong performance. Kava Group‘ (NYSE: Kava) On the same span, the stock price rose 160%. This eye-opening share price increases when you consider buying, selling or holding this upstart restaurant concept.
Let’s start with the good news: Cava is a Mediterranean-themed restaurant that uses a prefabricated prep system. It cooks food in the kitchen behind the counter, so the client knows it is freshly made. And the assembly line allows customers to adjust their choices to specific taste preferences.
What is this basically Chipotle Mexican Grill There is only the Mexican theme, too. Chipotle has grown significantly over the years, and despite recent weak prices, it has won huge winners for investors.
YCHARTS’ CMG data
To do this, Chipotle stock has risen 340% over the past decade, while the S&P 500 has risen about 190%. Investors bet on Kava is the next Chipotle. And there are good reasons to believe that, given that Kava only operates 350 restaurants at the end of the third quarter of 2024.
Chipotle operates over 3,700 restaurants. If the concept of Kava remains attractive to consumers, there will be huge growth opportunities soon. With sales of 18% in the same period in the third quarter of 2024, the concept is indeed very hot.
So the reason to buy Cava is that you think it can continue to expand actively, and maybe get similar long-term results to Chipotle.
The problem here is that investors have already set a lot of good news as Kava’s stock price. This is also the first sign of this fact over the past 12 months, but so is the price vs. P/E ratio.
Chipotle’s price-to-earnings ratio is about 50 times. This is high, but it actually pales compared to Cava’s price-to-earnings ratio of more than 300 times. For comparison, the average p/e for the S&P 500 index is 23.
Kava will likely continue to grow its business at an astonishing rate. But given the high valuation, even the slightest sign of powerlessness could lead investors to abandon stocks. In fact, the company may continue to perform well, and if momentum-driven investors decide to move on to another story stock, the stock may still fall.
If valuation is important to you, you won’t want to buy Cava. And, if you own it, you might want to consider making some profits. It has long been unusual for stocks to have high P/ES, while stock prices have lowered a reason for a frequent decline, as P/E drops to lower levels.
That said, if you own Cava, it may be difficult to justify selling it. Although stocks are expensive, the opportunity remains strong. Management is currently executing well, actively opening up new locations while keeping sales from existing locations in their existing locations. If the restaurant chain can continue to resonate with customers, there is no reason to believe it won’t grow into a lofty PE ratio.
However, if you decide to stick with it, make sure to keep track of same-store sales closely. Kava is unlikely to maintain 18% forever. But even if it can manage to reach half of that level, it will be an outstanding performance in an industry where a lower unit number is considered a reliable result. But the biggest takeaway is that if the story changes, you may need to react quickly, because the good news is that investors have already priced as stocks.
YCHARTS’ CMG data
Or, you can stick with it. As the chart shows, Chipotle has helped investors build wealth over the long term, but it has suffered some huge reductions. Iron stomach costs multiple 50% or more of the stock price drop, but this decline is not uncommon when you look at young, fast-growing companies. But to use this fluctuation to bring it together with Cava, you need to make sure you truly (really!) believe in the power of its concept of food.
Given its lofty valuation, value investors won’t like Kava. Income investors don’t like Kava because it doesn’t carry dividends. Growth investors are the group that may like this kind of stock. But even then, there is still valuation, which is almost extreme.
So, in fact, Kava is best suited for positive growth investors. Even then, there are some buyers who are careful because the market is clearly passionate about today’s stocks. Stock price turbulence is likely.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. Motley fool has a place and recommends Chipotle Mexican Grill. Motley Fool recommends Cava Group and recommends the following options: Short March 3, 2025 $58 Mexican Grill Phone. Motley Fool has a disclosure policy.
Will Cava buy, sell or hold in 2025? Originally published by Motley Fool
