Cava Group (NYSE: CAVA) has been one of the hottest restaurant stocks to own this year. As of Nov. 12, the stock is up a mammoth 237%, wildly outperforming the S&P 500, which is by no means having a bad year with its year-to-date gain of 25%.
However, investors may be concerned the stock is approaching its peak with a valuation that's just too rich. Cava trades at nearly 300 times its projected fiscal 2025 earnings (based on analysts' expectations). If you're looking for a more reasonably priced restaurant stock that also offers strong growth potential, consider Shake Shack (NYSE: SHAK).
Shake Shack is growing fast and has high aspirations
Shake Shack offers "elevated versions of American classics using only the best ingredients." Its popular burgers, fries, and milkshakes have fueled its market-beating gains this year with the stock up 76%. However, despite having 552 locations compared to Cava's 352, Shake Shack's market capitalization of $5.5 billion is just one-third of Cava's.
The company believes it's in a prime position to grow its operations. In a recent interview with CNBC, Shake Shack CEO Rob Lynch said the company is looking to expand globally, and he believes the niche in which Shake Shack operates could allow it to dominate. He added, "I don't think there is a competitor for Shake Shack. We talk about ourselves as being a part of the fine-casual movement; leading the fine-casual movement."
In its most recent quarter (ended Sept. 25), the company reported revenue of $316.9 million, which rose 15% year over year. It did incur a loss of $11.1 million, but that was due to impairment charges and losses on the disposal of assets.
With 200 of its locations outside the U.S. market, there's a lot of room for the business to get a whole lot bigger, both domestically and abroad.
The stock can provide investors with better value than Cava
Cava Group is the larger, more popular stock of the two, but Shake Shack is the better option for growth investors.
Data by YCharts.
If you want to jump on the Cava bandwagon, you'll be paying a significant premium, and when the market's expectations are this high, there is little to no margin of safety for investors if the company underperforms or has a bad quarter.
Is Shake Shack a better buy than Cava Group?
Both of these restaurant chains have been generating strong results, and both possess promising growth prospects. But it's important not to overlook valuation because it can have a significant impact on your overall returns.
With Shake Shack, you're getting a top growth stock in the restaurant industry at a valuation that actually leaves it with room to deliver solid returns over the long haul. It's the stock I'd go with right now.
Should you invest $1,000 in Shake Shack right now?
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy.
