Quick-service restaurants are a staple of American culture; in today's hustle and bustle, who doesn't occasionally need to grab food on the go? Older generations grew up with iconic brands like McDonald's. However, younger consumers seem to have different tastes than their parents and grandparents; according to a 2022 survey by Food Insight, nearly 8 in 10 Gen Z eaters have healthier dietary habits, including an emphasis on clean and plant-based foods.
Cava Group (NYSE: CAVA) and Chipotle Mexican Grill (NYSE: CMG) are two fast-growing quick-service restaurant brands with generous runways for long-term growth.
Both stocks have earned premium valuations with solid fundamentals and expansive growth opportunities.
Here is why investors should consider dollar-cost averaging into each and holding them for years.
The emerging Mediterranean craze
The Mediterranean diet -- heavy on plants, healthy fats, whole grains, and lean proteins while light on red meat -- is becoming one of the most popular diet trends in the United States. According to Stagwell, it has an 85% popularity rating among Americans and was named the most popular health plan for the seventh consecutive year in 2024. Studies have shown that a Mediterranean diet has numerous health benefits, including weight loss, improved cardiovascular health, and lower inflammation.
There is no quick-service Mediterranean restaurant chain with household-level brand recognition in the U.S., but that could soon change.
Cava Group is among a handful of brands racing to win mindshare among healthy eaters in America. The company was founded in 2006 but only went public last year. If you've ever been to a Chipotle, it's the same idea: fresh food prepared daily, with customizable meals made to order.
The investment potential with Cava is that it has a lot of room to expand. There are 323 restaurants, primarily located along the eastern and southeastern seaboards. That leaves most of the U.S. to grow into. Cava has increased its store footprint by 22% year over year as of Q1, including 13 new stores in the quarter. Expansion drove roughly 30% year-over-year revenue growth. Cava already has positive free cash flow and is GAAP profitable.
It's a simple business that should grow steadily as it opens new stores. Eventually, its profits might grow large enough for the company to begin repurchasing shares to continue driving earnings per share even higher. How much opportunity is ahead? There could eventually be thousands of Cava stores. (Taco Bell, for example, has nearly 8,000 stores in the U.S. alone.)
Cava stock trades like that of a software company at almost 10 times its enterprise value to sales, so it isn't cheap. Investors should buy slowly and get more aggressive if market volatility takes some wind out of Cava's sails.
Where freshness meets cultural appeal
Chipotle Mexican Grill has been around far longer than Cava has. The company started in the early 1990s and is now in a sweet spot as an established industry powerhouse with lots of growth potential.
Chipotle became famous for offering tremendous value with large, fresh portions at an affordable price. Chipotle's products include burritos, bowls, and salads with rice, proteins, and fresh garnishes like salsa, vegetables, and guacamole. The fare is both healthy and broadly appealing across different demographics.
The stock has vastly outperformed the S&P 500 since the company went public in 2006, returning more than 5,000%.
The formula is simple:
Chipotle's restaurants are very profitable. Each one that opens adds incremental cash flow and earnings.
Its store count has grown from 1,783 in 2014 to 2,941 as of Q2 2024.
The chain reinvests a portion of its profits to open more locations and repurchases stock with the rest.
The company's share count has decreased by almost 12% during that time.
The business generates a stellar 44.6% return on invested capital, which underlines how efficiently Chipotle deploys capital to create value.
Simply put, Chipotle needs to keep doing what it's already doing. The good news is that the business still has a long runway for expansion. Management sees 7,000 stores in North America over the long term, which speaks to Chipotle's remaining growth potential. The company has also begun dipping into foreign markets, including the U.K., France, Germany, and the Middle East.
Chipotle is mature enough that investors can value the stock on earnings; shares trade at a forward P/E of 48, while analysts believe earnings will grow by 22% annually for the next several years.
So if you're looking to invest in pure growth opportunities, both businesses look attractive enough for investors to nibble on a few shares of each while waiting for better buying opportunities.
Should you invest $1,000 in Cava Group right now?
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Cava Group and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
2 Quick-Service Restaurant Stocks to Buy and Hold for Great Long-Term Potential was originally published by The Motley Fool