CAVA Group stock charts bullish patterns before earnings release

CAVA Group stock price has sunk into a technical bear market after falling by over 60% from its all-time high.

Recently, however, it has rebounded by 62% from its lowest point in November and formed the rare inverted head-and-shoulders pattern ahead of the financial results. 

CAVA Group stock price technical analysis

The daily timeframe chart shows that the CAVA Group share price has rebounded in its past few months.

A closer look shows that two major reversal patterns have formed: an island reversal and an inverted head-and-shoulders pattern.

An island reversal pattern forms after an asset makes a big gap.

In this case, the stock made a big down-gap on August 12 last year. After the down-gap, the stock then consolidates and then rebounds.

The stock has also formed an inverted head-and-shoulders pattern, a common bullish reversal sign in technical analysis. It is now hovering at the neckline of this pattern.

At the same time, the stock has moved above the 50-day Exponential Moving Average (EMA), a sign that bulls are gaining control for now.

Also, the two lines of the Percentage Price Oscillator (PPO) have remained above the neutral level.

Therefore, the most likely scenario is where the CAVA Group stock continues rising, potentially to the key resistance at $92, its highest level in July last year.

The bullish outlook will become invalid if the stock drops below the left shoulder at $58.

CAVA Group earnings to be the key catalyst 

The next key catalyst for the CAVA stock price will be the upcoming financial results, which will come out on Wednesday.

These results will be important as they will provide more colour on its business, including revenue growth and costs.

The most recent results came below estimates, and the company decided to tweak its store opening plans for the year. Its earnings-per-share (EPS) came in at 12 cents, lower than the expected 13 cents.

CAVA Group tweaked its store opening plans to between 68 and 70, while the same-restaurant sales growth is expected to be between 4% and 6%.

Additionally, the company lowered its restaurant-level margin to between 24.4% and 25.2%.

CAVA Group stock also dropped after the company increased its store opening costs, which moved to between $18 million and $19 million, much higher than the previous estimate of between $15.5 million and $16.5 million.

Wall Street analysts expect the upcoming financial results to show that its fourth-quarter revenue rose by 18% to over $268 million.

Such a move will bring its annual revenue to be $1.17 billion, up by 21% YoY.

CAVA Group and other casual restaurant companies like Chipotle Mexican Grill are facing major challenges as operational costs jump and inflation pushes more customers to cut costs.

At the same time, the company has become highly overvalued even as the stock crashed by double digits from its all-time high.

It trades at a forward PE ratio of 133, much higher than the sector median of 17. Its multiple is much higher than Chipotle Mexican Grill’s 32.

Still, the company may be able to sustain the substantially high valuation if it demonstrates strong financial revenue growth.

This explains why the analysts like Truist, Telsey, UBS, and Citigroup recently boosted their target for the stock.