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1 Growth Stock Down 15%, Buy Now

Investors are showing Cava Group a lot of love, but there could be an opportunity in another company that popularized Cava’s business model.

Wall Street loves a growth story, and Cava group (CAVA 0.77%) This is exactly what investors are offered. But Cava stock’s appeal to investors is actually based on success Chipotle Mexican Grill (CMG -0.12%) achieved over time. And while Cava is trading near all-time highs, Chipotle stock is down 15% from its peak.

Given these dynamics, more conservative growth investors may want to look at Chipotle instead of Cava.

What do Chipotle (and Cava) do?

Chipotle has a Tex-Mex theme for its food products. Cava has a Mediterranean food theme. That’s the biggest difference between these two fast-casual restaurant chains. After that, they are almost copies of each other.

Image source: Getty Images.

The key to this is an assembly line style ordering process. Customers walk down a line and pick out fresh ingredients to add to their meals, meaning the food is personalized and doesn’t tend to become boring. In addition, the food is prepared on the assembly line in an open kitchen that the customer can see behind the assembly line, which further enhances the impression of “freshness”.

Customers appear to be enjoying the experience, with both restaurants seeing strong same-store sales growth. In the third quarter of 2024, Chipotle’s same-store sales growth was 6% (more on that in a moment). And while Cava hasn’t yet reported third-quarter results, the company reported same-store sales growth of 14.4% in the second quarter. A low single-digit value is considered pretty good in the restaurant industry, so both concepts perform relatively well.

CMG diagram

CMG data from YCharts

The Problem with Chipotle (and Cava)

Why is Cava stock at an all-time high and Chipotle stock down 15%? First of all, Chipotle is a much larger company and its growth prospects aren’t nearly as impressive as they once were. However, Chipotle’s long history of business growth shows how many opportunities lie ahead for Cava. That’s why investors are flocking to Cava because they believe it will be the next Chipotle. That could end up being true and is a good reason to consider the smaller restaurant chain.

However, Cava stock is currently trading at a price-to-earnings ratio of over 700! That’s a huge number and suggests investors are pricing in a lot of good news. Chipotle’s P/E ratio is a more modest 53. That’s also pretty high, but it’s actually below the five-year average of 74.

Therefore, Chipotle is relatively inexpensive compared to Cava and its own recent history. There are several reasons. First of all, the highly respected CEO just left the company to run another company. This makes investors worried about the business.

To make matters worse, same-store sales rose “only” 6% in the third quarter. While 6% growth in the same-store sales metric is fairly strong in the restaurant industry, it was below Chipotle’s second-quarter growth of 11.1%.

Apparently investors are worried that Chipotle has lost track. It was unfortunate that the company’s CEO left, but there was a team supporting the CEO. This team is mostly still in place and will probably be able to continue to run the company well.

And the decline in same-store sales was inevitable. A same-store sales growth rate of 11.1% is simply not sustainable. A 6% same-store sales growth rate for a restaurant brand the size of Chipotle is still very impressive and suggests that the company hasn’t lost its way despite the CEO’s departure.

Depreciation occurs in every company

Here’s the thing: Nothing is linear on Wall Street. Chipotle stock has declined several times throughout its history, only to rise back to new all-time highs. The fact is, customers like Chipotle’s food, and while demand may fluctuate in any given period, a strong food concept that’s still opening new locations (86 opened in the third quarter) is probably just the ticket in the long run Company you want to buy while it appears to be on sale.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and recommends the following options: Short December 2024 $54 Puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

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