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Since going public in June 2023, Cava (CAVA) has taken the fast-casual restaurant industry and Wall Street by storm. Cava describes itself as a “Mediterranean fast-casual restaurant brand that brings heart, health, and humanity to food.” As the chart below highlights, Cava shares are up 250+% since its IPO. The return is 5x its chief competitor Chipolte and 8x the S&P 500. Before Cava, Chipotle was a great growth story in the restaurant industry. Since 2007 it has increased the number of restaurants from 700 to 3500. Its earnings followed a similar growth rate.
At Cava’s current valuations, investors are betting that Cava can be the next Chipotle and then some. Enterprise value per store is a metric investors use to value and compare the profitability of restaurant chains. Enterprise value is a measure of a company’s total value. When divided by the number of stores, it provides a rough estimate of the value of each store. Cava has an enterprise value per store of approximately $35 million, almost double that of Chipotle. However, their AUV, measuring revenue per store, is only $2.7 million. Simply, Cava is trading at much higher multiples than Chipoltle and even more so against other restaurant chains.
Cava shares undoubtedly have value. However, is its share price getting ahead of its growth prospects?
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Market Trading Update
Due to a technical glitch in yesterday’s commentary, our market trading update was lost. However, I wanted to address a question I received about the “seasonal buy signal” and the confluence of overbought conditions. In this past weekend’s newsletter, I discussed the issuance of the seasonal buy signal, which was confirmed by the triggering of the weekly MACD crossover. The chart is shown below.
As shown, when you confirm “buy signals” on a weekly basis, markets tend to rise. The 2020 signals were triggered early due to the massive stimulus programs and remained intact through 2021. Interestingly, they did NOT trigger a “buy signal” in October 2021, which turned out well for investors. The next “buy signal” was triggered in November 2022 and again in November 2023. The signals have again triggered as of last month.
This is where the confusion seems to have set in. While the markets are indeed on a buy signal, we have suggested taking profits, rebalancing risks, and managing portfolios in the near term because they are overbought and deviated above longer-term means. The seasonal buy signals do not preclude the markets from having 5-10% corrections along the way higher.
Furthermore, negative divergences are also forming as momentum and relative strength are failing to pace the market higher. This suggests that buyers are becoming more scarce.
It can be confusing to have a bullish “buy signal” for the seasonally strong period while managing risk and rebalancing portfolios simultaneously. However, the two are not mutually exclusive. The confluence of the buy signal with overbought conditions does tell us that pullbacks and corrections will likely be shallow and will present investors with opportunities to increase equity exposure as needed.
As is always the case, how you manage your portfolio is up to you. However, for now, the bulls are winning the market argument.
Import Export Prices And The UK Point to Further Disinflation
U.S. import prices fell 0.4% last month following a 0.2% decline in the prior month. Export prices fell by 0.7%. On a year-over-year basis, import prices are down 0.1%, and export prices are down by 0.7%. Lower import prices will help on the U.S. inflation front, specifically the prices of food and energy. It is worth noting that typical supply and demand factors affect import and export prices, but the dollar’s value is equally important. A stronger dollar results in weaker import prices and vice versa.
British CPI fell to 1.7%, down from 2.2%. The inflation reading was .20% below estimates and, importantly, lower than the Bank of England’s (BOE) 2% goal. The BOE is now widely expected to cut rates at its November 7th meeting. As the Bloomberg graph below shows, the prices of goods are the chief culprit behind lower inflation, but services prices are also slowly decreasing. The sharper-than-expected decline results in the pound losing ground against the dollar. Since the beginning of October the pound has depreciated about 4% versus the dollar. Thus, import prices of British goods will be commensurately lower.
The VIX and the Market Climb- Should We Care?
With the presidential election in a few weeks, the Fed changing course on monetary policy, and Israel potentially attacking Iranian oil facilities, the increasing level of implied risk should not be shocking. Will the elevated VIX persist alongside the rising market, or will the market correct?
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