Why Cava Group Stock Was Withering This Week

Cava Group (NYSE: CAVA) absolutely crushed estimates in its first quarter, reported last week, but you wouldn't know it from the stock's trajectory through the past couple of days. According to data compiled by S&P Global Market Intelligence, as of early Friday morning the restaurant chain operator's shares were down by almost 13% in price week to date.

Cava is caving

Very few investors or professional Cava-watchers could fault the company's performance during the quarter, as it posted strong double-digit percentage gains in both revenue and profitability, not to mention an encouraging rise in customer traffic.

Image source: Getty Images.

That earnings report wasn't perfect, of course, with a few concerns such as the company's slightly drooping restaurant-level profit margin. Overall, though, it would be the envy of any ambitious growth company, particularly in the always challenging restaurant industry.

Rather, it seems the market has become concerned with the extremely high valuations of Cava stock, which even after the week's sell-off sports a sky-high forward P/E of nearly 141 and a price-to-sales ratio approaching 10. Contrast that with a more durable investor favorite in the restaurant sphere, Chipotle Mexican Grill, whose respective figures are far more modest at 42 and 6.

This stock's time probably isn't now

While it certainly seems as if some kind of price correction is on tap, as an investor I wouldn't entirely turn my back on Cava. The company clearly has its finger on the pulse of what Americans want to eat these days -- light but tasty fare -- and is being admirably cautious in not expanding its footprint too quickly. This is very much a stock to watch, but as it's awfully pricey I wouldn't be a buyer... yet.

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Eric Volkman 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 June 2025 $55 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.