CAVA Group Inc. (CAVA): Mediterranean Marvel or Short Sellers’ Nightmare?

We recently published a list of 10 Worst Booming Stocks to Buy According to Short Sellers. In this article, we are going to take a look at where CAVA Group Inc. (NYSE:CAVA) stands against other worst booming stocks to buy according to short sellers.

Are We Really In September?

September has historically been one of the worst months for US stocks. Considering this and the performance of big tech, particularly AI stocks, in the first week of the month, many investors have been shocked by the performance of the S&P 500 and the Nasdaq Composite Index in the second week of September. Both indices showcased their best performance this year during this week, and both were up for five days in a row. So, it’s not surprising that many investors are confused about what this means and how this even came about in the first place.

According to Tom Lee, Co-founder and Managing Partner at Fundstrat Global Advisors, this is the type of performance investors can expect to see over the next eight weeks up to Election Day – and perhaps even for a couple of weeks after that. With the much-awaited Fed meeting also coming up next week, Lee expects more support especially since we already have enough reason to believe that the Fed is going to make some cuts. According to Lee, with the inflation data coming in better than before and with the labor markets needing more support, the Fed’s actions will give the markets more confidence. This will translate into stocks trading well in the upcoming weeks.

Expected Future Trends

Lee noted that, at least for the next 12 months, investors should be more confident about the markets and their performance. The potential rate cut is not the only reason for this. Another positive factor is the upcoming election – according to Lee, historically, the markets have always performed well in the months coming after an election. This past trend is making the November-December period also look good for stocks in the US. Lee also commented that the policies of both Presidential candidates are good enough for the markets to do well in 2025 as well. So, even if investors see a little more turbulence, the long-term expectations for the market seem largely positive.

In terms of what stocks investors should be looking at in this new environment, Lee noted that the general rule for any investor should be to buy the best companies in any area first. These would be the companies that are able to beat any type of cycle and promise high returns to their shareholders, basically blue chip stocks. At the same time, Lee expects that when the Fed moves rates back toward neutral, cyclical and small-cap stocks will also benefit immensely from the tailwinds created by this move. Because of this, Lee expects small-caps to do really well in the next 12 months.

These insights have highlighted that the markets are now on an upward growth trajectory, and we’ve been seeing a lot of stocks generate immense returns because of this. However, many such booming stocks are being relentlessly shorted, which may brew confusion among investors about which companies to buy now. We’ve thus compiled a list of some booming stocks that short sellers consider to be the worst players in the market and explained whether you should consider buying them or not.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

CAVA Group Inc. (CAVA): Mediterranean Marvel or Short Sellers' Nightmare?

A close-up image of a colorful salad platter with toppings and dressings.

CAVA Group Inc. (NYSE:CAVA)

Year-to-Date Performance as of September 14: 199.8%

Short % of Shares Outstanding as of September 14: 10.3%

Number of Hedge Fund Holders: 33

CAVA Group Inc. (NYSE:CAVA) is a consumer discretionary player that owns and operates a chain of restaurants under the CAVA brand. It is based in Washington, DC.

This company has been working on expanding its reach in the US, for which it opened 18 new locations during the second quarter. The new locations have helped CAVA Group Inc. (NYSE:CAVA) boost its overall sales, which rose by over 14% for the quarter. While many investors have been skeptical about restaurant stocks since they usually struggle with profitability, CAVA Group Inc. (NYSE:CAVA) has been working hard not to live up to this general reputation. In the second quarter alone, the company’s profit margin was about 27%.

A major reason why CAVA Group Inc. (NYSE:CAVA) has been able to perform better than other restaurant stocks this year is its value proposition. The company offers quality food at affordable prices, and the cuisine it serves – Mediterranean – is also more differentiated than your typical restaurants. CAVA Group Inc. (NYSE:CAVA) has also been benefiting immensely from its new market entry into Chicago, which has been the strongest market entry for the company in its history.

So, while short sellers might be betting against this stock, 33 hedge funds were still long CAVA Group Inc. (NYSE:CAVA) in the second quarter, with a total stake value of $895.2 million. This highlights the company’s intrinsic value and why it should be considered a worthwhile investment.

Next Century Growth Investors, LLC mentioned CAVA Group Inc. (NYSE:CAVA) in its first-quarter 2024 investor letter:

“CAVA Group, Inc. (NYSE:CAVA) is a fast casual restaurant chain serving authentic Mediterranean cuisine, featuring customizable bowls and pitas. CAVA currently owns and operates >300 stores, and the company targets a 15% plus new store growth rate. The intermediate goal is to have 1,000 stores by 2032 with plenty of opportunity to grow beyond that level. The company already delivers solid restaurant level margins >20% and they believe 3-5% same store sales growth is achievable over time. As the business matures, they should be able to leverage G&A expense which should lead to strong earnings growth over many years.”

Overall, CAVA ranks 9th on our list of 10 worst booming stocks to buy according to short sellers. While we acknowledge the potential of CAVA as an investment, we believe that AI stocks hold promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CAVA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.