A large part of my job involves traveling around the globe to uncover the next big investment opportunities. I attend conferences to hear what industry experts are discussing. I meet with company executives. And I conduct onsite research to discover which companies are ahead of the rest.
Longtime readers know that my home base is Nicaragua. So when I travel, I often have to live out of hotels and eat most of my meals at restaurants. As someone who cares about my health, my diet is very important to me. That tends to lead to difficult decisions when it comes to picking a spot for lunch or dinner.
But that also means I know which eateries are better than their peers.
Today, I want to dive into some fast-casual restaurants that have stood out to me recently.
Quoting a line from the hit show Seinfeld, “[it’s] not fast food, [it’s] good food quickly.” I’d put fast-casual restaurants in that category – a step above fast food but not quite a sit-down-and-order kind of place. Some could be worth looking at for possible investment opportunities…
Let’s start with CAVA Group (CAVA). I like to refer to it as the “Mediterranean Chipotle (CMG)” because of its customizable way of ordering.
The $14.5 billion company went public in mid-2023 and has among the best-performing restaurant stocks in the market ever since. Shares are up nearly 180% since their initial public offering (IPO) and hit a new all-time high this week.
The recent strength is thanks in part to second-quarter earnings released last Thursday. Revenue was up 35% year over year and easily beat expectations. Meanwhile, same-store sales – which are likely the most important metric for a restaurant – crushed estimates, up 14.4% over the previous year versus expectations of 8.2% growth.
CAVA is extremely pricey at current levels – trading with a forward price-to-earnings (P/E) ratio of 273 and a price-to-sales (P/S) ratio of 13. I wouldn’t chase it here. But a pullback in the future could make shares attractive.
And as for its food, CAVA is pretty darn good.
Sweetgreen (SG) IPO’d in 2021 and has yet to get back to the high from its first day of trading. But it’s up more than 200% since CAVA went public – making it the best-performing restaurant stock over that period.
Similar to CAVA, customers can customize their meal choices at Sweetgreen. Its menu leans toward the healthier side of eating – providing solid options for lunch crowds that want food quickly but aren’t in the mood for a greasy burger. For what it’s worth, my experiences there have been good but not great.
The company has yet to generate a profit, and there are currently no expectations that one will be achieved in the coming years. It’s trading with a P/S ratio of 5 – less than half of CAVA when comparing them on an apples-to-apples basis.
Sweetgreen’s stock is up 4X from its November low and has lots of momentum behind it. However, I wouldn’t chase the stock here. Be patient. I’d like to see a pullback before considering it as an addition to any of our portfolios.
The final company I want to mention today is Portillo’s (PTLO). It’s a smaller business with a market cap of just $750 million. But something about it catches my attention…
Portillo’s is a Chicago-based fast-casual restaurant that focuses on Chicago street food. I lived in the city for two years, and one of my guilty pleasures was a Chicago hot dog that I could get at Portillo’s. Any time I go back to town, you can bet I’m getting one.
The company went public in 2021 and rallied for a few weeks initially. Then, it began a downtrend that it has been stuck in for years. The chart isn’t pretty, as you can see above. But the business is profitable and trading at a decent valuation versus its peers – with a forward P/E ratio of 33.5 and P/S ratio of 0.9.
To be clear, I’m not recommending Portillo’s as a buy today. But it’s a good stock to add your watch list. I believe there’s a good chance it can trade at higher valuations in the coming years.
All of this talk about food has me hungry, so I’m off to get some food.
Enjoy the rest of your day! I’ll be back in touch with a new episode of the SteadyTrade Podcast tomorrow.
Here’s to the future,
Matt McCallEditor, Market Insights
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