Restaurant stocks have defied expectations of inflation-induced decline and are among the market's top performers.

Mediterranean restaurant chain Cava Group Inc. (NYSE: CAVA) is one of the industry's standouts, returning 60.96% in the past three months. The Cava chart shows the stock is actionable, trading about 4% below its February 29 high of $59.84. 

Cava stock is finding support 6.1% above its 10-day moving average, suggesting some profit-taking after a big recent rally rather than a rush for the exits.

Cava went public at $15 in June and has shown typical post-IPO price action. After rallying to a high of $58.10 in early August, Cava stock pulled into a correction. 

In this case, the pullback was fairly steep, at 47%, likely due to the relatively small market capitalization and limited number of shares in float, both of which contribute to volatility. 

Cava Stock Formed Post-IPO Consolidation

After an IPO, stocks retreat as initial excitement subsides and early investors take some profits.

Sometimes, a post-IPO pullback coincides with a broad market downturn. In Cava's situation, the stock began selling off in tandem with the broader market in August 2023. 

Cava stock returned to rally mode in October as the market also rallied.

The AdvisorShares Restaurant ETF (NYSEARCA: EATZ) corrected more than the broader market between mid-August and mid-December 2023. 

Cava is a component of that ETF, an actively managed fund whose largest holdings include Wingstop Inc. (NASDAQ: WING), Shake Shack Inc. (NYSE SHAK), US Foods Holding Corp. (NYSE: USFD), Casey’s General Stores Inc. (NASDAQ: CASY) and Brinker International Inc. (NYSE: EAT).

Wingstop, Shake Shack Among Top Restaurant Stocks

The ETF holds stocks of companies that derive at least 50% of their net revenue from the restaurant business, defined as restaurants and companies that supply the industry. It's up 14.19% in the past three months.

Wingstop and Shake Shack have been central to the ETF's performance, as they've returned 50.93% and 73.94%, respectively, in the past three months.

When a stock belongs to a strong-performing industry, it often indicates favorable market dynamics and growth prospects. That’s the case with the restaurant industry, which is experiencing strong demand.

According to 2023 data from the U.S. Census Bureau, Americans spend 20% more at restaurants than grocery stores. 

Comparing Industry Stalwart with an Upstart

That type of industry-wide trend tends to lift the stocks of companies executing well.

Among consumer discretionary stocks, McDonald’s Corp. (NYSE: MCD) is the largest restaurant stock in the Consumer Discretionary Select Sector SPDR Fund (NYSEARCA: XLY).

McDonald's has returned 2.25% in the past three months. However, it's tough to compare a veteran company like McDonald's with younger, smaller, more agile companies like Cava, Wingstop and Shake Shack, all of which are in growth mode. At the same time, McDonald's was considered a mature company decades ago. 

MarketBeat's Cava Group earnings data show the company has been beating analysts' net income views since going public. 

Cava earnings have been increasing much faster than McDonald's, which is a comparison just to highlight the growth rate of a recent IPO. That fast growth is particularly true of a new stock in a hot industry, which restaurants represent now. 

Attracting Attention from Big Investment Banks

The Cava Group analyst forecasts show a consensus of “moderate buy.” For a new company, Cava has attracted attention from some big investment banks, including Goldman Sachs, Citigroup and Morgan Stanley. 

That indicates that institutional investors are interested in a particular stock and that investment banks anticipate business from the company.

On January 24, Argus initiated coverage of Cava with a “hold” rating. 

"The company, in our view, appears poised to take advantage of growth opportunities in its targeted Mediterranean niche as well as in the fast-casual segment of the restaurant industry," Argus analysts wrote. 

Analysts' Robust Long-Term Growth Forecast

They cited a profitable business model, a clean balance sheet and an experienced management team as strengths, adding that they forecast long-term growth of 20%, a robust rate.

They added that shares appear fairly valued at $46, whereas Cava stock trades just shy of $58.

The consensus price target is $55.10, a downside of 5.02%, indicating that other analysts also believe the price has gotten a little frothy lately.