Top Investment Opportunity currently: Cava Mezze vs. Realty Income Corporation
Investors are often advised to diversify, which involves categorizing stocks. However, sometimes it's beneficial to consider things from a slightly different perspective.
Investors analyzing the restaurant company Cava (-3.91%) might also want to consider Realty Income (-1.24%), a real estate investment trust (REIT). Let's delve into why these two distinct stocks could serve a similar purpose.
The operations of Cava versus Realty Income
Cava runs Mediterranean-themed fast-casual dining establishments. The trend is quite popular, as evidenced by a 18.1% increase in same-store sales at their locations. This is an exceptional growth rate for a restaurant, where a single-digit increase is typically considered impressive. The robust same-store sales, combined with new store openings, has led to comparisons to the Wall Street favorite, Chipotle Mexican Grill.
Cava expanded its store count by over 21% year-over-year in the third quarter, yet it only has 352 restaurant locations. Chipotle, on the other hand, has over 3,600 locations. If Cava reaches Chipotle's size, there's still significant growth potential. Notably, both restaurant concepts employ a similar assembly-line service model, leading to their comparison.
Realty Income, on the other hand, is a REIT. It purchases physical properties and leases them to tenants, unlike a restaurant. Interestingly, about 73% of the company's rental income comes from retail properties, which could include restaurants. Quick-service and casual-dining restaurants make up less than 10% of the company's total rental income. This is where things get intriguing.
Realty Income's protective measures vs. fully investing in Cava
Cava's stock has soared, rising an astounding 300% in a year as of now. Investors are buying it, hoping for rapid growth. However, the valuation is now exorbitant, with a price-to-earnings ratio of 340 times. A lot of good news is factored into this P/E ratio, and any negative development could lead to a sharp stock drop.
Fast-growing restaurants occasionally rush to please Wall Street's demand for growth. The past is filled with restaurants that were highly popular but eventually went out of business. Red Lobster tops the list of restaurant bankruptcies in 2024, but there are numerous others that had to seek bankruptcy protection.
This doesn't imply that Cava will bankrupt, only that the restaurant industry's fortunes fluctuate over time. If you invest in Cava, you're making a bold bet that the good news continues to flow.
Realty Income leases properties to restaurants, among other retailers. Its primary objective is to establish a reliable rental stream. It deals with bankrupt tenants occasionally.
Realty Income has over 1,550 unique tenants, so no single tenant has a significant impact on its performance. Even in a tenant bankruptcy, Realty Income continues to own a valuable physical asset that can either be resold or rented to a more promising tenant.
In a fair comparison, Realty Income is an income investment, not a growth investment. Its dividend yield is currently an appealing 5.5%. The dividend has increased annually for three decades at a compound annual rate of 4.3%. Realty Income is a slow and steady investment that could appeal to conservative income investors.
However, if you find the risk of investing in a highflier like Cava unbearable, Realty Income offers a way to gain exposure to restaurants (and more broadly, the retail sector) without having to shoulder the unique risks associated with a specific retail business.
Realty Income: A retail powerhouse
Comparing Realty Income to Cava aims to emphasize that investing in a hot restaurant stock (or retailer) exposes you to business-specific risks. Buying Realty Income could offer retail exposure without the high risks involved when betting on a single retail business's success.
In essence, Realty Income provides a more conservative retail investment option, shielding investors from the very real risks involved in betting on a single retail business's success. This makes it a more attractive choice for many investors.
After considering the risk of investing in a high-flyer like Cava, some investors might prefer to gain exposure to the retail sector without the unique risks associated with a specific retail business. Instead, they could opt for Realty Income, a company that leverages its vast portfolio of properties to generate a reliable income stream.
Moreover, diversifying one's investment portfolio can be crucial in managing risk. For example, an investor might diversify their finance by considering Realty Income as an alternative to expensive growth stocks like Cava, thus balancing potential returns with risk management strategies.
