Why I'm Bullish on Darden

Includes: DRI, SH
by: Glenn McSpadden

https://staticseekingalpha.a.ssl.fastly.net/uploads/2009/2/16/saupload_0116redlobster.jpgThere is a new Red Lobster near my house. It's right next to a one year old Olive Garden. I drove by yesterday at 2:00 in the afternoon. Both had groups of people huddled outside with their little restaurant buzzers waiting on their tables. Both Olive Garden and Red Lobster are best of breed restaurant brands that have been around forever and are owned by the publicly traded company Darden Restaurants, Inc. (NYSE:DRI).

So I'm bullish on Darden. Here's why.

Fundamental Reasons:

  • There is still strong demand for their product.
  • Their raw material and input costs are way down (food, fuel, labor).
  • They are having no problem hiring people at no doubt competitive wages.
  • They have highly recognizable brands that will survive the economic downturn and gain market share from weaker brands that will not survive.
  • Its dividend is just under 3%.
  • The dividend was raised 10% last Spring and it has stayed at that level through 3 quarterly payments.

Technical Reasons:

  • It's been trending up since the lows of November without pulling back as much as the S&P 500.
  • It's up around 3% year to date while the S&P 500 is down around 10%.
  • The 10 day moving average is above the 30 day.
  • It's forming the right side of a "cup and handle" pattern.
While I'm bullish on Darden, I've decided for the foreseeable future to hedge anything I buy with at least a 1/3 position in the SH (Inverse S&P 500 ETF). I'm also going to sell some out of the money calls against DRI since I expect it to go up, but I don't expect a huge pop. Here's a hypothetical plan....
  • Buy 100 DRI at around $29 = $2,900
  • Buy 13 shares of SH at around $77 = $1,000
  • Sell 1 DRI April 35 call for around $85.
Disclosure - Long DRI and SH.