3 Stocks the Market Is Willing to Overpay for Right Now

Key Points

• Three stocks stand out in the market because of the willingness to pay a premium valuation for them in the coming months.
• Wall Street analysts justify these premiums through their EPS growth forecasts and price targets.
• Fundamental reasoning is also aligned for these companies to overtake peers in the following quarters.

Investors think that the market is only gauged by price and price alone. Still, these are only the superficial ways that the market advertises opportunity in an asset class (which is all that a price quote is: advertisement). Where markets really send a message to investors is in the way that they value certain asset classes and specific investments like stocks.

For example, when choosing a doctor to get treated for an illness or a lawyer to solve a case, the more expensive their rates are, the better the results will likely be. This is the same for the stock market; when markets are not willing to pay for a specific business or even discount it below industry or peer averages, it must be because of its quality. The opposite is true; paying a premium for a stock means the future is perceived to be bright, and investors should pay attention.

Today, three stocks stand out in the way they are commanding these premium valuations. Starting with the retail sector through restaurants, CAVA Group Inc. NYSE: CAVA offers investors a double-digit upside and a premium justified by the business’ growth lately. Then, consumer discretionary travel platform Booking Holdings Inc. NASDAQ: BKNG to potentially rally on new travel trends; finally, there is Coinbase Global Inc. NASDAQ: COIN for the new crypto bull run.

Some Call It the Next Chipotle, but CAVA Blazes Its Own Trail

The king of the bowl-building fast food restaurant concept was once Chipotle Mexican Grill Inc. NYSE: CMG, but the up-and-coming CAVA could soon take that spot. Not necessarily on a size basis, as Chipotle’s market capitalization of $76.9 billion is way above CAVA’s $14 billion today.

But, as investors now know, it’s not about size or price but rather about valuation. CAVA stock trades at a 326x price-to-earnings (P/E) ratio, which might seem a little rich for some investors, especially compared to Chipotle’s 55.2x multiple.

However, the reason for this premium can be found in CAVA’s latest quarterly earnings results, where investors can see the 22.2% growth in total CAVA locations across the United States over the year. This quick growth enables the brand to tap into what’s known as economies of scale.

Scale means that operations become more efficient as costs can be distributed among more stores, and that’s why restaurant-level margins grew to $61.3 million or 37.3% above the previous year.

Noticing this significant growth momentum, Wall Street analysts now forecast up to 18.6% earnings per share (EPS) growth in CAVA for the next 12 months, but that might be conservative.

Rate Cuts Position Booking Stock at a Premium Over Its Peers

With the Federal Reserve (the Fed) set to cut interest rates, the impact on currency exchange rates will be significant, particularly for the dollar against the Euro. As interest rates heavily influence currency values, a weaker dollar could make the Euro more valuable.

For Booking Holdings, this shift presents a major opportunity. Over 40% of the company’s revenue comes from European markets, positioning it to benefit from increased travel activity as a stronger Euro boosts demand. Investors are already recognizing this advantage, which is why Booking trades at a premium compared to peers like Expedia Group Inc. NASDAQ: EXPE.

Currently, Booking commands a price-to-earnings (P/E) ratio of 22.2x, significantly higher than Expedia’s 11.8x. This premium reflects not only the anticipated effects of the Fed’s rate cut, but also Booking’s projected 14% growth this year. Jefferies Financial analysts have set a price target of $4,200 for the stock, which implies a 7% rally from its current level, potentially marking the start of even more upside.

Bitcoin’s Next Rally Could Propel Coinbase Stock Higher

Lower interest rates also come with a trend for ‘risk-on’ attitudes in the overall market, which has historically benefited asset classes like cryptocurrencies. At the helm of the space is Bitcoin, whose price action is what stocks like Coinbase need to see their fees shoot higher.

This stock is currently trading at 58% of its 52-week high, indicating significant room for price growth. The market recognizes this potential, as investors are willing to pay a P/E ratio of 32.5x for Coinbase, compared to the sector's 24.6x valuation.

Noticing this bullish trend pending for Coinbase stock, those at JMP Securities decided to boost their price targets for $320 a share, calling for as much as 96.3% upside from where the stock trades today. Another technical gauge for investors to consider is the stock’s short interest.

Coinbase stock’s short interest has declined consistently since the first quarter of 2024, showing signs of bearish capitulation and opening room for bullish traders and investors to take their place, such as the $2.8 billion that entered the company over the past 12 months.