I first wrote about up and coming Mediterranean fast-casual chain CAVA six months ago in “Legendary Days: Adventures In San Diego” (May 16, 2024). I had read about it a Barron’s article about the “next Chipotle”. But since there weren’t any in the Bay Area, I had to wait for my Coronado trip to try the one in La Jolla. It was fantastic, I was a believer and I subsequently bought the stock for ~$80.
Three months later (August 22), CAVA reported a superb 2Q24 with comps +14.4% and the stock took off the following day. The stock was already expensive when I bought it and I was happy with my 50% gain in three months. I took profits. In retrospect, however, perhaps I sold too soon.
That’s because CAVA continued to move higher for the next three months. Technically, the market didn’t really give me any reason to sell since the post earnings gap was never violated. I was simply uncomfortable holding such an expensive stock and happy with my 50% gain in three months.
The reaction to their most recent 3Q24 earnings report Tuesday afternoon, however, strikes me as being a warning sign. Once again the quarter was superb with comps of +18.1% on the back of +14.1% a year ago. The compound growth is astounding; the growth and fundamentals are phenomenal.
But the stock opened at its highs and faded badly all day long. This suggests that the stock is out of gas or, to put it another way, that supply significantly exceeds demand at those prices. In technical analysis, this is called an exhaustion candle. Perhaps the extreme valuation now matters – whereas it didn’t three months ago. At $170, CAVA was trading for 160x its 2024 Adjusted EBITDA guidance!
If I were a better trader, I probably should have held until yesterday when the trading action suggested exhaustion. In that case, I would have had a 100% gain in six months rather than 50% in three. That’s a lesson for me. For those of you still in the stock though, this is something you might want to pay attention to.