2 Quick Service Restaurant Stocks to Buy and Hold for Big Long-Term Potential

Quick service restaurants are a staple of American culture; in today’s hustle and bustle, who doesn’t occasionally need to grab food on the go? Older generations grew up with iconic brands like McDonald’s. However, younger consumers seem to have different tastes than their parents and grandparents; according to a 2022 survey by Food Insight, nearly 8 in 10 Gen Z consumers have healthier eating habits, including an emphasis on clean and plant-based foods.

The Cava Group (NYSE: CAVA) and Chipotle Mexican Grill (NYSE: CMG) are two fast-growing, quick-service restaurant brands with generous runways for long-term growth.

Both stocks have earned premium valuations with solid fundamentals and expansive growth opportunities.

Here’s why investors should consider dollar cost averaging in each and holding onto them for years.

The Developing Madness of the Mediterranean

The Mediterranean diet — rich in plants, healthy fats, whole grains and lean protein while light on red meat — is becoming one of the most popular diet trends in the United States. According to Stagwell, it has an 85% popularity rating among Americans and was named the most popular health plan for the seventh consecutive year in 2024. Studies have shown that a Mediterranean diet has numerous health benefits, including weight loss , improved cardiovascular health and decreased inflammation.

There isn’t a quick-service Mediterranean restaurant chain with household brand recognition in the U.S., but that could soon change.

Cava Group is among a handful of brands vying for market share among America’s health-conscious consumers. The company was founded in 2006, but only went public last year. If you’ve ever been to a Chipotle, it’s the same idea: fresh food prepared daily with customizable, made-to-order meals.

The investment potential with Cava is that it has a lot of room for expansion. There are 323 restaurants, located mainly along the eastern and southeastern seaboard. That leaves most of the United States to grow. Cava grew its store footprint by 22% year-over-year since Q1, including 13 new stores in the quarter. The expansion has driven revenue growth of around 30% year over year. Cava already has positive free cash flow and is GAAP profitable.

It’s a simple business that should grow steadily as it opens new stores. Eventually, its profits could grow high enough for the company to start buying back shares to continue driving earnings per share even further. How much opportunity lies ahead? Eventually there could be thousands of Cava stores. (Taco Bell, for example, has nearly 8,000 stores in the US alone.)

The story continues

Cava stock trades like a software company at nearly 10 times enterprise value to sales, so it’s not cheap. Investors should buy slowly and become more aggressive if market volatility takes some wind out of Cava’s sails.

Where freshness meets cultural appeal

Chipotle Mexican Grill has been around a lot longer than Cava. The company started in the early 1990s and is now in a sweet spot as an established powerhouse in the industry with plenty of potential for growth.

Chipotle has become famous for offering great value with large, fresh portions at an affordable price. Chipotle’s products include burritos, bowls and salads with rice, protein and fresh sides like salsa, vegetables and guacamole. The fare is both healthy and generally appealing to various demographics.

The stock has far outperformed the S&P 500 since the company went public in 2006, with a return of more than 5,000%.

The formula is simple:

• Chipotle’s restaurants are very profitable. Each one that opens adds cash flow and incremental earnings.

• The number of stores increased from 1,783 in 2014 to 2,941 in Q2 2024.

• The chain reinvests some of the profits to open more locations and buys back shares with the rest.

• The company’s shares have fallen nearly 12% during that time.

• The business generates a whopping 44.6% return on invested capital, which underscores how effectively Chipotle is deploying capital to create value.

Simply put, Chipotle needs to keep doing what it’s already doing. The good news is that the business still has a long way to go. Management sees 7,000 stores in North America over the long term, which shows Chipotle’s remaining growth potential. The company also began to penetrate foreign markets, including the UK, France, Germany and the Middle East.

Chipotle is mature enough that investors can value the stock based on earnings; The stock trades at a forward P/E of 48, while analysts believe earnings will grow 22% annually over the next few years.

So if you’re looking to invest in pure growth opportunities, both businesses look attractive enough for investors to nibble on a few shares of each while waiting for better buying opportunities.

Should you invest $1,000 in Cava Group right now?

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Justin Pope 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 September 2024 $52 put on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

2 Quick Service Restaurant Stocks to Buy and Hold for Big Long-Term Potential was originally published by The Motley Fool