1 Growth stock down 15% to buy now

Wall Street loves a growth story, and Cava group (CAVA 0.77%) Investors are given exactly that. But the attractiveness of Cava’s stock to investors is actually based on the success it brings Chipotle Mexican Grill (CMG -0.12%) has achieved over time. And while Cava is trading near an all-time high, Chipotle shares have retreated 15% from their highs.

Given this dynamic, more conservative growth investors might consider looking at Chipotle instead of Cava.

What does Chipotle (and Cava) do?

Chipotle has a Tex-Mex theme for its food products. Cava has a Mediterranean food theme. That’s the biggest difference between these two fast-casual restaurant chains. After that they are almost copies of each other.

Image source: Getty Images.

The key to each is an assembly line-style ordering process. Customers walk down the line to select fresh ingredients to add to their meals, meaning the food is personalized and doesn’t tend to go stale. Additionally, the food is prepared on the line in an open kitchen that customers can see behind the conveyor belt, further enhancing the perception of “freshness.”

Customers are apparently enjoying the experience, as both restaurants report strong same-store sales growth. In Q3 2024, Chipotle’s same-store sales growth was 6% (more on that in a second). And while Cava hasn’t yet reported third-quarter results, it posted 14.4% same-store sales growth in the second quarter. Low single digits are considered pretty good in the restaurant industry, so both concepts are doing relatively well.

CMG data by YCharts

The Problem with Chipotle (and Cava)

So why are Cava shares at an all-time high and Chipotle down 15%? For starters, Chipotle is a much larger company and its growth prospects aren’t nearly as impressive as they used to be. However, Chipotle’s long history of business growth shows how much opportunity lies ahead for Cava. So investors are flocking to Cava, thinking it will be the next Chipotle. That may ultimately be true, and it’s a good reason to consider the smaller restaurant chain.

However, Cava shares are currently trading at a price-to-earnings ratio of over 700! That’s a huge number and suggests that investors are pricing in a lot of good news. Chipotle’s price-to-earnings ratio is a more modest 53. That’s also quite high, but it’s actually below the five-year average of 74.

So Chipotle is relatively cheap compared to Cava and its own recent history. There are several reasons. For starters, the company’s highly respected CEO just left to run another company. That worries investors about the company.

This was further exacerbated by same-store sales growth of “only” 6% in the third quarter. While the restaurant sector’s 6% same-store sales growth is quite strong, it was lower than Chipotle’s second-quarter growth of 11.1%.

It seems investors are worried that Chipotle has lost its way. It was unfortunate that the CEO of the company left, but there was a team supporting the CEO. That team largely still exists and will probably be able to guide the company well.

And the drop in same-store sales was inevitable. Same-store sales growth of 11.1% is simply not sustainable. Same-store sales growth of 6% for a restaurant brand the size of Chipotle is still very impressive and indicates that the company has not lost its way despite the departure of its CEO.

Drawdowns happen to every business

The point is: nothing goes in a straight line on Wall Street. Chipotle’s shares have retreated several times over their history, only to soar to new all-time highs. The fact is, customers like Chipotle’s food, and while demand may wax and wane over a period of time, a strong food concept that is still opening new locations (86 opened in the third quarter) is likely to be the type of food in the long run that company you wanted to buy when it seemed to be on sale.