There are many restaurant chains, but few make it to become the next Starbucks or Chipotle Mexican Grill. If you do find the next breakout chain, though, it could turn your investment parabolic.
There are a few fairly new initial public offering (IPO) stocks that have strong momentum and potential. Cava Group(NYSE: CAVA) and Dutch Bros(NYSE: BROS) are two that deserve a look from growth investors.
1. Could Cava be the next Chipotle?
Cava made a big splash when it went public last summer. I wonder if it would have caught as much attention if it had gone public during a time with more IPO activity. Right before the last bear market hit in 2022, there were two back-to-back years of record IPOs. That came to an abrupt halt, and Cava was an exciting option when there was a dearth of IPOs.
Investors loved Cava right from the start, and it's going splendidly. Cava is reporting strong growth and even profits, not a sure thing from young growth stocks. Sales were up 35% year over year in the second quarter with a strong contribution from same-stores sales, which were up 14%. The company has 341 total stores as of the end of the quarter, quite a small number, and it anticipates opening up to 1,000 stores by 2032.
The chain has a similar concept to Chipotle, which has become one of the most incredible restaurant stocks to own. Cava features healthy, fresh, customizable dishes like sandwiches and bowls with a Mediterranean spin. It's fast-casual at its best, featuring upscale food at prices its customers can afford. The company has demonstrated a fair amount of resilience despite a pressured economy, and there's every reason to expect that it can keep it up, especially as inflation moderates and interest rates go down.
There's one big problem with Cava stock, and that's its valuation. As Cava comes through on its premise, investors find it irresistible and keep pushing up the price. Cava stock is up 188% this year and trades at the fantastic forward one-year P/E ratio of 250. That's a nosebleed valuation that's unusual for a non-tech stock.
I keep saying Cava is too expensive, and so far, it keeps rising anyway. Does that mean it will eventually burst? Possibly. You have to have a strong stomach for risk to buy at this price, but over time, Cava could grow into its valuation and be a standout stock.
2. Could Dutch Bros be the next Starbucks?
Dutch Bros is making similar waves in the coffee world. It's been around for decades as a small, Oregon-based chain with local stores, but it is undergoing a countrywide expansion with the goal of opening 4,000 stores over the next 10 to 15 years, up from 912 at the end of the second quarter.
What makes Dutch Bros stand out is its relaxed and friendly culture, in contrast with Starbucks' more urban feel. Along with that vibe, Dutch Bros offers its own take on beverage innovation, with signature, bold drinks (and names) and a focus on customer service. Its prices are also more in line with a down-to-earth atmosphere, meaning its products are cheaper than Starbucks.
So far, the concept is transferring well to different regions across the country. It's still concentrated in the West, but it's expanding across states in the South and is currently open in 18 states.
Dutch Bros is reporting high growth, which came in at 30% year over year in the second quarter. This was mostly driven by new stores, 30 in the quarter, but same-store sales are making a comeback and increased 4.1% year over year. As Dutch Bros gets is name out and establishes a strong presence in some of its new regions, and with tailwinds from lower interest rates, that number is likely to get higher.
As Dutch Bros scales, it's becoming increasingly profitable. Net income increased from $9.7 million last year to $22.2 million this year in the second quarter.
The company's best growth may still be ahead. It's been testing a pilot program for mobile ordering at some of its locations, and it's getting ready to roll it out throughout its business by the end of the year. Married with a robust loyalty program, the program could boost sales to a new degree.
Dutch Bros is surprisingly cheap for a high-growth stock, trading at a price-to-sales ratio of 2.3 and a forward P/E of 66. It looks like it could be a strong addition to a growth portfolio right now.
Should you invest $1,000 in Cava Group right now?
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends Cava Group and Dutch Bros. The Motley Fool has a disclosure policy.
