Diversifying Investments: Cava vs. Realty Income
Understanding how to diversify your investments is crucial. While most investors focus on stocks from the same industry, considering companies from different sectors can yield surprising benefits. For those evaluating the Mediterranean fast-casual restaurant Cava (NYSE: CAVA), it might be worthwhile to also look at Realty Income (NYSE: O), a real estate investment trust (REIT). This article will explore why these two companies may serve similar investment purposes despite their differences.
Comparing Cava and Realty Income: What They Do
Cava runs a popular chain of Mediterranean-themed fast-casual restaurants. Notably, same-store sales surged by 18.1%, a remarkable achievement in the restaurant industry where single-digit growth is often considered successful. This impressive growth, alongside the opening of new locations, has drawn comparisons to the well-recognized Chipotle Mexican Grill.
Image source: Cava Group.
Despite a year-over-year increase of over 21% in store count during the third quarter, Cava has only 352 locations compared to Chipotle’s more than 3,600. Significant growth potential remains for Cava if it can expand to Chipotle’s scale. Both companies utilize a similar assembly-line service model, which is a key reason for the comparisons.
On the other hand, Realty Income is fundamentally different, as it is a REIT that owns physical properties and leases them to tenants. Interestingly, around 73% of its rental revenue is derived from retail properties, which encompass restaurants, while quick-service and casual dining establishments make up less than 10% of its overall rental income. This presents a unique intersection between the two businesses.
Cava’s Growth Risks vs. Realty Income’s Stability
As of now, Cava’s stock has skyrocketed by a staggering 300% over the past year. Investors are excited about potential growth, but this enthusiasm has inflated the valuation, leading to a price-to-earnings (P/E) ratio of 340 times. A considerable amount of good news is already priced in, and any negative developments could lead to a steep decline in stock value.
Fast-growing restaurant chains often rush to meet Wall Street’s high expectations, which can result in significant volatility. History has seen many once-promising restaurant chains fall flat; for instance, Red Lobster faced bankruptcy in 2024 among several others needing court protection.
It’s important to note that this is not to imply that Cava will experience bankruptcy; however, the ups and downs of the restaurant industry can pose risks. Investing in Cava requires a bold bet on its continued success.
Realty Income, conversely, relies on managing properties leased to a vast array of tenants, including restaurants. It seeks to maintain a steady rental income stream and is equipped to handle tenant bankruptcies.
Having over 1,550 unique tenants minimizes the impact of any single tenant’s struggles on Realty Income’s overall performance. Even in the event of a tenant bankruptcy, Realty Income still holds the physical asset, which can be re-leased or sold.
It’s essential to understand that Realty Income is primarily an income investment rather than a growth investment. It currently boasts an attractive dividend yield of 5.5%, with a history of annual increases over the last three decades, averaging a 4.3% compound growth rate. For conservative investors, Realty Income may resemble the reliability of a slow and steady tortoise.
If you prefer to avoid the risks tied to high-flying stocks like Cava, Realty Income offers a more stable approach to gaining exposure to the restaurant industry and broader retail sector.
Investing in Cava: Is it Worth It?
Before making an investment in Cava Group, consider this crucial point:
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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 suggests the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
