Cava is a Mediterranean food restaurant where you can build your own healthy bowls, similar to Chipotle. It IPO’ed in June 2023 and has 263 restaurants in 22 states and DC. I have not yet seen or been to one here in Florida. It had plans to open 44 more in 2023. That would have been a little less than 20% restaurant growth.
I am often skeptical about restaurants, for instance, I hate the idea of Sweet Greens with offers a health salad bar at what I suspect is a high price. SG seems like a very limited audience, while Cava seems more likely to be repeat customers, because salads just suck and not many people want that frequently.
Anyway, I feel this has potential to grow fast for a few years, maybe like Chipotle, but I would not buy without the proper chart, fundamentals and breakout.
The weekly chart shows and early IPO base that had a decent return and then a quick decline. Now, the green EPS growth rate line show good growing EPS, of course starting from a new company’s small base.
Recently you can see a number of blue volume bars with above avg volume.
The Daily chart…
Here we see more detail on the IPO base that we missed, looks like a double bottom. Early IPO bases are usually short and more volatile than a more mature base. Very hard to trade (for me).
In that big cup with handle base (that I missed), we see a number of good signs. There are some big (red) volume shakeouts that got rid of a lot of weak holders. These occurred early on the left side and then at the bottom of that base (we love that). The bottom of the base spend some good time bouncing around support at the $29 level. We see a high volume up day that shot the stock above the 50dma and 21dma at the same time. Huge volume! This is a place where many a good trader might take a chance. I might have taken a small position, but I probably would have waited for more proof of strength.
After that volume cooled off as the base built the right side. There was more blue/up volume than red/down volume, which you need to see on the right side of a base.
On Jan 24, it started to build a handle on the cup, something I love to see. Many of the great stock runs in history started with a cup with handle base. But, a lot of those were good stocks that were consolidating during a long market correction, and then having strong earnings and high RS, were able to blast off as the market started a long rally.
This handle and subsequent breakout where highly flawed. The length of the handle was 5-6 days, which is acceptable in CANSLIM (IBD), but given the 126 long cup, it was relatively too short. Like a good handle, it slowly declined on decreasing volume (sellers drying up). Then one day it broke out above the high point of the handle. Unfortunately, volume was only 11% and we need at least a 40% vol increase to give us confidence the professionals are buying this and will support our buy prices. For that reason, no one should have bought here. (in retrospect, it went up in price a lot, but you can’t know that. You can hit on a 19 in blackjack and get a 2, but you should not take that chance).
So now I wait with this on a watch list. I have sketched in a hopeful base that might form with at 15% or more correction, but that is pure speculation. But I won’t buy without a proper base and continuing good earnings.
How would you have handled this, keeping in mind that you don’t know the outcome at the time you are making your buy.
Pete
