Why cava stock rose 35% in August

Shares of the Mediterranean fast-casual restaurant chain Cava (COFFEE -0.50%) rose 35.4% in August, according to data provided by S&P Global Market Intelligence. Strong financial results for the second quarter of 2024 and a correspondingly enthusiastic response from Wall Street boosted the stock to an all-time high. But a subsequent selloff in shares caused a modest pullback.

On August 22, Cava reported its second quarter financial results, and it was all good news for shareholders. Its second-quarter revenue rose 35% compared to the same quarter in 2023. It also posted its highest quarterly profit margin ever at 8.5%.

There were other highlights in the Q2 report. With strong financial results, Wall Street sang Cava’s praises. Many analysts have raised their price targets for the stock – in other words, after looking at the numbers, these investment professionals have decided that the upside is bigger than they previously thought. This boosted general investor sentiment.

However, something at the end of the month threw some cold water on all of this. Several insiders sold shares, including co-founder and CEO Brett Schulman, who sold about 200,000 shares on August 26. When insiders sell, it can indicate that the stock is overvalued, which is why Cava stock has pulled back from its all-time high. .

Is this a problem for Cava?

I wouldn’t necessarily hit the panic button if I were a Cava shareholder. For founders, growing a business and publishing it is a journey. Plus, it can be a low-income trip. So it stands to reason that insiders could cash in on certain shares and ultimately reap some of the rewards of the business’s success.

That said, insiders don’t seem to sell as much when a stock is undervalued. And investors may already be a little upset when it comes to Cava’s valuation. As of this writing, it trades at 16 times sales.

CAVA PS report data by YCharts.

This is not necessarily unheard of for a restaurant stock. But it’s unusual for a company like Cava, which uses a company-owned model instead of a franchise model. Moreover, all company restaurant locations are rent — does not own real estate. I don’t even own real estate, we would expect a lower valuation for Cava than what it is getting now.

What should investors do now?

In my opinion, Cava is both a great business and an overvalued stock. These two realities could motivate different responses for different investors.

For investors who might already be planning to sell Cava shares in 2024, I think today’s valuation offers an excellent price.

For investors who don’t intend to sell, Cava is still a great business, and T2 proved that more than ever. And the longer a quality business has, the less the valuation tends to matter. Understand that the stock may underperform for a while if its valuation declines in the short term. But if Cava continues to perform as it has, it may rise beyond valuation risk.