By Evie Liu

High-growth food stocks -- whether restaurants or packaged foods -- were once market darlings, rallying for months on high-flying valuations that could even outshine some tech giants. Yet as investors become cautious about expensive multiples, the shares are looking very volatile.

The group has seen large jumps or declines in share prices in reaction to its financial reports. Companies showing any signs of slowdown are quickly losing favor. Prices have surged for those that have kept the momentum going, but it's uncertain how long that could last. Investors should tread carefully.

Last week, Wingstop shares plunged after the chicken restaurant reported fourth-quarter revenue that fell slightly short of expectations -- despite a 27% increase from a year ago. Same-store sales rose 10%, while earnings per share grew 45%, beating Wall Street estimates. Still, the stock has tumbled nearly 24% since Tuesday's close.

Likewise, shares in Freshpet -- a fast-growing company selling fresh, refrigerated pet food -- fell 19% last Thursday and another 6% the next day following its quarterly report. Although earnings increased 16% from the year-ago period and sales climbed 22%, both missed analyst estimates -- and investors didn't take it well.

Many growth stocks in the food space have been feeling the pain as market favor shifts. Celsius Holdings, the energy-drink maker that's quickly taken market share from legacy brands like Monster Beverage and Red Bull, had seen its shares slump as much as 78% since last May as its expansion hit a bottleneck. However, shares shot up nearly 260% in the two years before that.

Celsius stock soared nearly 30% on Friday after the company posted better-than-expected results for the fourth quarter and announced an acquisition deal that could rekindle growth. Still, some analysts remain cautious on how far it can expand even with the acquisition, as the energy-drink category has seen soft consumer sentiment and heightened competition.

Sweetgreen, the fast-casual chain known for salad bowls, has lost half of its value since the end of November after the company posted deeper-than-expected losses for the third quarter of 2024. Its 13% year-over-year sales growth was also a step down from the plus-20% in previous quarters. The stock had surged nearly 300% in 2024 before it fell from the peak.

"The valuations are pretty stretched, all the signs have been pointing toward a correction of the markets," says Morningstar analyst Sean Dunlop.

The restaurant industry has been struggling with slowing traffic amid high menu prices. Usually when consumers are stretched, they trade down to cheaper options, such as fast food. But this time around, people found even fast food too expensive for the value they offer and traded up to fast casual instead. "Investors were seeking any company that provides enough value for the money that consumers continue to visit, and the market has greatly rewarded firms that delivered that," says Dunlop.

The multiples on fast-casual chains, such as Sweetgreen and Cava Group, expanded dramatically, outperforming the industry by a massive margin. But many investors are starting to realize that these high-flying companies won't always see comparable sales growth in the midteens.

In Dunlop's model, most restaurant names are still trading at a premium to their intrinsic value, calculated based on discounted cash flow for the next 10 years. He has a fair value estimate for Wingstop of $181. The stock currently trades at $234 even after the recent slump.

To be sure, some companies continue to bust the targets and their stocks soar. But there are recent signs of cracks.

Last Wednesday, coffee chain Dutch Bros posted a 35% gain in top line with expanded margins in the fourth quarter. Shares went up nearly 30% on the news, but the stock tumbled 7% on Friday without obvious reasons. Shares are now 178% higher than they were a year ago, at seven times forward sales and 121 times forward earnings.

Shake Shack shares shot up 10% on Thursday after fourth-quarter results beat estimates. Revenue increased 15% year-over-year, and earnings jumped to 26 cents per share from two cents a year ago. But the stock lost much of those gains on Friday. Still, shares are up 12% over the past 12 months, trading at three times forward sales and 83 times forward earnings.

Cava shares tumbled 9% on Friday, Sweetgreen is down by 7%, and shares in Brinker International -- the owner of Chili's, another winning restaurant brand in 2024 -- fell 6%.

Both Cava and Sweetgreen are scheduled to report fourth-quarter earnings this week. Expect more volatile rides to come.

Write to Evie Liu at evie.liu@barrons.com

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February 24, 2025 03:00 ET (08:00 GMT)

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