Why Cava Stock Dropped 20% in December

Shares of restaurant company Cava Group (NYSE: CAVA) dropped 19.9% during December, according to data provided by S&P Global Market Intelligence. On one hand, fellow high-flying restaurant stock Sweetgreen was down by almost the same amount, and its decline started at the same time as Cava's, which suggests the drop for Cava isn't directly related to the company.

On the other hand, there was a lot of insider selling for Cava stock in December, which often unsettles investors.

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Investors dislike insider selling because these stakeholders often have a more direct and timely look into the business. Some investors think that if insiders sell, then they know something that the rest of us don't.

For perspective, Cava stock more than tripled in value during the first 11 months of 2024. Given the insider selling, many investors may have been motivated to lock in gains by selling. And selling pressure led to the drop for Cava stock in December.

Investors spooked by insider selling

Among the sellers of Cava stock are co-founder and CEO Brett Schulman and Chairman of the Board Ronald Shaich. For his part, Shaich is famous in the restaurant stock world, known for founding Panera and leading it when it was a publicly traded company.

Shaich sold over three million shares on Dec. 9, both shares that he owned directly or indirectly. For his part, Schulman sold around 300,000 shares on Dec. 5 and Dec. 9 combined. Granted, both still own a lot of Cava stock: Shaich owns more than three million shares and Schulman owns more than 800,000 shares directly.

There was also some insider buying in December, but insiders were exercising stock options. In fact, Schulman only sold shares that he had immediately acquired via stock options. In short, investors were discouraged by insider selling, and the insider buying didn't carry the same weight as the selling because the shares weren't acquired at market prices.

Why are investors easily spooked?

If Cava's stock performance to date had been ho-hum or if its valuation was reasonable, I don't think that investors would bat an eye at these insider transactions. But Cava is up big, which always makes shareholders antsy. And the valuation is undeniably expensive.

Cava stock has skyrocketed to a price-to-sales (P/S) valuation of 15. That's more than double its valuation when it went public. For perspective, restaurant stocks often trade at 1 to 2 times sales. They could trade at 5 to 10 times sales for richly valued ones. Cava stock at 15 looks expensive no matter how it's sliced.

CAVA PS Ratio data by YCharts.

In other words, insiders have the appearance of cashing out at the highs, which is why investors are more easily spooked.

Cava still has a lot of long-term growth opportunity. Insiders will buy and sell in the future. And it's important to not be knocked off balance by those shifting winds in the future. Rather, investors should individually decide how much they're willing to pay today for that upside potential.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends Cava Group and Sweetgreen. The Motley Fool has a disclosure policy.