Investors are told to diversify, which requires breaking stocks into groups. It's a good way to invest, but sometimes you need to think about things just a little differently.
This is why investors examining restaurant company Cava(NYSE: CAVA) might want to also consider Realty Income(NYSE: O), a real estate investment trust (REIT). Here's a look at why these two seemingly different stocks could fulfill the same purpose.
What does Cava do versus what Realty Income does?
Cava operates Mediterranean-themed fast-casual restaurants. The concept is very popular right now, noting that same-store sales at the company's locations rose 18.1%. That's a shockingly high number for a restaurant, where low single digits is normally considered pretty good. The same-store sales growth, coupled with new store openings, has investors making comparisons to former Wall Street darling Chipotle Mexican Grill.
Image source: Cava Group.
The big attraction is the fact that, even after increasing its store count by more than 21% year over year in the third quarter, Cava still only has 352 restaurant locations. Chipotle has more than 3,600 locations. If Cava can grow to the size of Chipotle, there's still huge growth ahead. Notably, both food concepts use a similar assembly-line service model, which is why they get compared to each other.
Realty Income, meanwhile, is a REIT. It owns physical properties and leases them to tenants, which is nothing like a restaurant. However, roughly 73% of the company's rents come from retail properties, a group that would include restaurants. Quick-service and casual-dining restaurants combined make up less than 10% of the company's total rent roll. This is where things get interesting.
Realty Income's black boxes versus going all-in with Cava
Cava's stock has skyrocketed, rising a huge 300% in a year as of this writing. Investors are buying it hoping that it can continue to grow quickly, but that's pushed the valuation to an extreme. The price-to-earnings ratio is an astonishing 340 times. A lot of good news is priced into that P/E ratio, and if anything goes wrong, the stock could fall sharply.
It isn't uncommon for fast-growing restaurant chains to get ahead of themselves in an effort to appease Wall Street's desire for growth. History is littered with restaurants that were hot, but eventually flamed out. Red Lobster tops the list of restaurant bankruptcies in 2024, but there are plenty of others that had to seek out court protection.
This isn't to suggest that Cava will go bankrupt, only that the fortunes of restaurants go up and down over time. If you buy Cava, you are making a fairly aggressive bet that the good news keeps on flowing.
Realty Income leases its properties to restaurants, and a lot of other retailers, too. It doesn't really matter what company is occupying the assets it owns, it just wants to create a reliable rental stream. And sometimes it has to deal with tenants that go bankrupt.
However, Realty Income has more than 1,550 unique tenants, so no single tenant is likely to be overly impactful to performance. And, even in a tenant bankruptcy, Realty Income still owns a physical asset that it can sell or re-lease to another, hopefully better, tenant.
To be fair, Realty Income is an income investment, not a growth investment. The dividend yield is an attractive 5.5% today. The dividend has been increased annually for three decades at a compound annual rate of 4.3%. Realty Income is, basically, a slow and steady tortoise that a conservative income investor might like to own.
That said, if you can't stand the risk of investing in a highflier like Cava, Realty Income gives you a way to get exposure to restaurants (and more broadly, the retail sector) without having to shoulder all the concept-specific risk.
Realty Income is a retail powerhouse
Comparing Realty Income with Cava is really meant to highlight that buying a hot restaurant stock (or retailer) brings with it very specific company risk. Buying Realty Income probably won't provide the same kind of upside, but it owns properties that can be re-leased if a hot restaurant (or retail) tenant suddenly cools off.
In other words, you can get retail exposure with Realty Income without having to take on the very real risks involved when you bet on the success of a single retail business. This means that, for many investors, the more conservative route offered by Realty Income will probably be the better choice.
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Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Realty Income. The Motley Fool recommends Cava Group and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
