Olive Garden parent Darden Restaurants Inc. (DRI) traded sharply higher on Tuesday morning, lifting into a critical test of the 2016 bull market high after beating third-quarter EPS estimates and guiding fiscal year 2017 above consensus. They also announced the acquisition of the Cheddar’s Scratch Kitchen chain in an all-cash deal that’s expected to add 12-cents per share to fiscal 2018 results.
Activist shareholder Starboard Value LP maintained control for several years, forcing the company to sell Red Lobster in 2014, following chronically weak metrics at the seafood chain. The hedge fund reduced their stake and moved on to other opportunities in 2016, allowing Darden to refocus on profitable acquisitions in a tough leisure environment that has generated mediocre comps and contracting margins.
DRI Long-term Chart (1995-2017)
The company came public at $6.49 (post two stock splits) in May 1995 and topped out at $8.36 one year later. A downtrend into the first quarter of 1997 got bought near $4.00, triggering a fresh uptick that stalled at $13.96 in May 1999. The stock held up exceptionally well through the Dot.com bear market, ending a brief downturn in March 2000 and posting healthy gains into the 2002 high at $26.65.
A steady uptrend through the mid-decade bull market finally topped out in the low-40s in June 2007. The stock plunged into the start of 2008 and bounced into mid-year, ahead of a second and more vicious decline during the economic collapse. It finally bottomed out at a 7-year low just below $12 and bounced strongly into April 2009, completing a V-shaped pattern into the August 2008 high.
A 2010 breakout above the 2007 high failed to attract momentum buyers, giving way to a dead sideways pattern that failed to reward shareholders for the next four years. The stock finally rallied above range resistance after the 2014 Red Lobster sale while the subsequent advance stalled in the middle of 2015, yielding a 15-month consolidation pattern, followed by a November 2016 breakout to an all-time high.
The monthly Stochastics oscillator entered a buy cycle in September 2016 that’s now grinding through the upper-half of the indicator panel. It still hasn’t reached the overbought level, predicting at least three to six more months of relative strength before aggressive sellers take control. In the meantime, price action has reached a perfect spot for a breakout and fresh round of all-time highs.
DRI Short-Term Chart (2015–2017)
The stock eased into a trading range after the July 2015 peak at $67.69, drawing the outline of an ascending triangle pattern. The high volume November rally cleared pattern resistance, lifting to an all-time high at $79.43 in December, ahead of a pullback that got bought at the 50-day EMA in January 2017. A month-long test at that level attracted solid buying interest, yielding a bullish upturn that’s now reached the prior high. Meanwhile, price action has set a solid floor in the upper-60s, with pullbacks into that level signaling buying opportunities.
On Balance Volume (OBV) has matched price action for many years, turning lower in the middle of 2015 and resuming its upward trajectory in July 2016. The indicator zoomed to a new high with price in the fourth quarter, signaling a bullish convergence that predicts the rally is likely to continue in coming years. It also tells us the stock is likely to break out into the mid-80s in coming weeks.
The Bottom Line
Olive Garden parent Darden Restaurants (DRI) is trading just above the 2016 high near $80 on Tuesday morning, following a strong earnings report and bullish guidance. Shareholders are also pleased the company is back in the acquisition game after 2014’s controversial Red Lobster divestiture.
<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>