Shares of Mediterranean restaurant company Cava Group (NYSE: CAVA) jumped on Tuesday. As of 12:40 p.m. ET, Cava stock was up almost 17%, and the reason why isn’t immediately apparent.
What investors do know is that today is the expiration of Cava’s lock-up period. And investors have also observed unusually high trading volume today. Here’s what these two things mean.
What are lock-up periods and trading volume?
When Cava went public in June, it had over 111 million diluted shares outstanding. However, only 14.4 million shares were available for trading — just 13% of the total. The end result is that the stock was more illiquid than it otherwise would be. Small increases in buying pressure or selling pressure can lead to larger-than-expected volatility in the share price.
The other 96.9 million shares of Cava were subject to a 180-day lock-up period, meaning they couldn’t be sold during that time. The lock-up period, however, expired today. Therefore, it’s possible that most of the shares could be put up for sale, leading to more sellers than buyers. The stock could consequently fall.
Just because these shares are no longer locked up doesn’t automatically mean the market will get overwhelmed by a flood of Cava shares. Indeed, roughly 13.6 million shares have traded hands today so far, according to Yahoo! Finance, which is almost 10 times its normal trading volume. The fact that the stock is up rather than down indicates that buyers still outnumber sellers, despite the end of the lock-up period.
Do these things matter for investors?
What moves a stock in a single day isn’t necessarily material for long-term investors. Indeed, supposing Cava’s locked-up shares flood the market in coming days, the downward pressure would be temporary. Over the course of quarters and years, investors are looking for business growth and profits.
Cava is opening many new restaurants, and it’s already a profitable company. On its current trajectory, I’d say it has what it takes to create value. But the company has been public for less than a year, and shares are commonly volatile this early on, as evidenced by Cava’s jump higher today.
Interested investors, therefore, will need to understand that volatility goes both ways, and this stock can be equally jumpy to the downside.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends Cava Group. The Motley Fool has a disclosure policy.
Why Did Cava Stock Jump Higher on Tuesday? was originally published by The Motley Fool