Strong demand from the restaurant sector increases Cava

CAVA on the image of a smartphone.

Key points

  • Cava Group shares are currently trading about 4% below their Feb. 29 high of $59.84, finding support 6.1% above their 10-day moving average, a bullish sign.
  • Strong demand in the restaurant sector supports the performance of Cava and other fairly new stocks such as Wingstop and Shake Shack.
  • Cava Group’s earnings have exceeded analysts’ expectations since it went public.
  • 5 stocks we prefer to CAVA Group

Restaurant stocks have defied expectations of an inflation-induced decline and are among the market’s best performers.

Mediterranean restaurant chain Quarry Group Inc. NYSE: QUARRY it is one of the leading stocks in the sector, with a return of 60.96% in the last three months. The Cava chart shows the stock is serviceable, trading about 4% below its Feb. 29 high of $59.84.

Cava stock is finding support 6.1% above its 10-day moving average, suggesting some profit taking after a big recent rally rather than a rush to the exits.

Cava went public at $15 in June and has shown typical post-IPO price action. After reaching a high of $58.10 in early August, Cava stock underwent a correction.

In this case, the pullback was quite steep, at 47%, likely due to the relatively small market capitalization and limited number of shares in the float, both of which contribute to volatility.

Post-IPO consolidation consisting of Cava stock

After an IPO, stocks retreat as the initial enthusiasm fades and early investors take some profits.

Sometimes, a post-IPO pullback coincides with a broad market downturn. In Cava’s situation, shares began to sell off along with the broader market in August 2023.

Cava stock returned to rally mode in October, while the market also recovered.

THE AdvisorShares Restaurant ETF NYSEARCA: EATZ corrected more than the broader market between mid-August and mid-December 2023.

Cava is a component of that ETF, an actively managed fund whose largest holdings include Wingstop Inc. NASDAQ: ALA, Shake Shack Inc. (NYSE SHAK), US Foods Holding Corp. NYSE:USFD, Casey’s General Stores Inc. NASDAQ: CASY AND Brinker International Inc. NYSE: EAT.

Wingstop and Shake Shack among the top restaurant titles

The ETF holds shares of companies that derive at least 50% of their net revenues from the restaurant industry, defined as restaurants and companies that supply the industry. It has increased by 14.19% in the last three months.

Wingstop and Shake Shack have been key to the ETF’s performance, as they have returned 50.93% and 73.94%, respectively, over the past three months.

When a stock belongs to a strong performing sector, it often indicates favorable market dynamics and growth prospects. This is the case of the catering sector, which is experiencing strong demand.

According to 2023 data from the US Census Bureau, Americans spend 20% more at restaurants than at grocery stores.

Comparison between an established sector and a newcomer

This type of industry-wide trend tends to drive up the stocks of companies that perform well.

Among the consumer discretionary titles, McDonald’s Corp. NYSE: MCD is the largest restaurant warehouse in the SPDR fund for selected consumer discretionary sectors NYSEARCA: XLY.

McDonald’s has returned 2.25% over the past three months. However, it’s difficult to compare a veteran company like McDonald’s to younger, smaller, more nimble companies like Cava, Wingstop, and Shake Shack, all of which are in the growth phase. At the same time, decades ago McDonald’s was considered a mature company.

Cava Group earnings data from MarketBeat shows the company has beaten analysts’ net income forecasts since going public.

Cava’s earnings have grown much faster than McDonald’s, which is a comparison only to highlight the growth rate of a recent IPO. This rapid growth is especially true for a new stock in a hot sector, which restaurants represent today.

Attract the attention of large investment banks

Cava Group analysts’ forecasts show a “moderate buy” consensus. For a new company, Cava has attracted the attention of some large investment banks, including Goldman Sachs, Citigroup and Morgan Stanley.

This indicates that institutional investors are interested in a particular stock and that investment banks are anticipating the company’s deals.

On January 24, Argus initiated coverage of Cava with a “hold” rating.

“The company, in our view, appears poised to capitalize on growth opportunities in its targeted Mediterranean niche, as well as in the fast-casual segment of the restaurant industry,” Argus analysts wrote.

Analysts have strong long-term growth forecasts

They cited a profitable business model, a clean balance sheet and an experienced management team as strengths, adding that they expect long-term growth of 20%, a robust rate.

They added that the shares appear to be fairly valued at $46, while Cava shares are trading just under $58.

The consensus price target is $55.10, a downside of 5.02%, indicating that other analysts also believe the price has become a bit frothy lately.

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