Look At This Restaurant Stock For Future Growth

11/30/14

                  With oil prices plunging into the depths of hell, I thought I would take the time to recommend a stock that I have loved for a while now and one that should greatly benefit from lower prices the pump, Darden Restaurants (DRI).  For those who are unfamiliar with the company, Darden owns and operates the restaurant chains; Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V’s and Yard House.   Earlier in the year, Darden came under attack by activist investor Starboard Value LP, when in October, having already taken out the CEO, they ousted the previous Board of Directors and replaced all 12 with their own nominated slate.  Currently, Starboard has hired Executive search firm, Korn Ferry, to find a new CEO, and with current CFO, Brad Richmond, retiring early next year, Darden’s management shake-up is headed in the right direction.  Since the ousting of former CEO, Clarence Otis, the company has run more efficiently and more importantly, increased same-store sales.  The company has introduced online ordering, which has greatly increased Olive Garden’s takeout business, introduced lower-calorie items and sped up lunch service.  Additionally, September same-store sales rose 0.6%, the first MoM increase in almost a year.  With a new board in place, Darden can easily spin-off its specialty restaurants like Eddie V’s and Capital Grille, unlocking significant value for the company.  If you look at the success that competitor Brinker International (owner of Chili’s restaurants), has had after selling off On the Border and the Macaroni Grill, along with cutting labor and food costs, Darden’s game plan should see similar results. 

                  Since the rapid drop in oil began early in October, food service stocks like Chipotle, McDonalds, Jack-in-the-Box and Starbucks have all rallied hard, but Darden is one of the leaders, up about 20% to new all-time highs.  Despite that rise, Darden is still very cheap, trading at a P/E of around 11, while competitors, DineEquity and Brinker International, trade at 2x the price.  Not only is the stock cheap, but it also pays a hefty 3.90% dividend, better than McDonalds, Brinker, and Yum Brands.  Darden reports 2^nd quarter results on December 15^th, and is expected to earn $0.27/share, up 80% QoQ and analysts anticipate Darden will increase YoY earnings and revenue guidance.  A couple months ago, Darden forecast same-store sales growth at Olive Garden to be between 0-1%, LongHorn of 1-2% and 2% growth for it’s speciality restaurants.  Not only do I believe Darden will beat those estimates, but I also see them raising full year guidance. 

                  As I previously mentioned, Darden is trading at all-time highs, closing on Friday at $56.99.  While I believe in the long-term story, you don’t have to run out and buy the stock right now.  I think you can wait for the stock to pull back to $55, which has been key support since it gapped up in early November.  But with gas prices staying low for what seems like the considerable future, job creation on the rise, wage growth soon to creep higher, and activist investors leading the charge, Darden Restaurants has a bright future, and one that you should be a part of.

My current positions: Long Ford (F), Gilead Sciences (GILD), Starbucks (SBUX), Macy’s (M), Google (GOOGL), Facebook (FB), Delta Airlines (DAL), Whole Foods (WFM), Wells Fargo (WFC), General Motors (GM), ConocoPhillips (COP), Kinder Morgan (KMI), Time Warner (TWX), Palo Alto Networks (PANW), Twitter (TWTR), NXP Semiconductors (NXPI), Lockheed Martin (LMT), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), long Mobileye (MBLY) December calls, Jack In The Box (JACK), Under Armour (UA), Masco (MAS). 

Jeff Lewison

A Couple Good Bets for Years-End

11/22/14

                  Even with the S&P making new all-time highs on a daily basis, heading into year-end there are still a number of stocks that have a lot of room to run.  Ever since crude oil traded down to $77 the first time, I have been very bullish on energy, with my favorite being EOG Resources.  Despite crude oil falling to multi-year lows in October, EOG was still able to put up strong earnings, beating estimates on EPS and revenues.  The company reported revenues of $5.1B, up about 45% YoY and EPS was up 100% to $2.01/share.  EOG does most of it’s drilling in the Eagle Ford and Bakken shale, where the company can still increase production despite lower oil prices, estimating that FY14 production will increase 16.4% compared to earlier predictions of 14%.  EOG has been able to operate more efficiently than competitors, increasing margins and production during the previous quarter.  Management said that oil would have to trade down to about $65/barrel for a considerable amount of time in order for them to cut production, something that I don’t see happening.  EOG is trading at 20x FY15 earnings, and while that’s a premium to the industry, I still think it’s a great way to play energy going into the end of the year and beyond.  EOG is still about 14.5% off all-times this year, but is up 25% from the October lows.  On Friday, EOG closed at $101.74, gapping above an upward sloping 200-day moving average.  That’s a level that I see holding and rallying from to make new all-time highs.   

                  Another sector that I really like going into next year is the red-hot housing sector.  Now, I have been bullish this sector all year long, but these stocks have been so beaten up all year long, that this recent rally should absolutely continue into next year.  Recent earnings reports from Home Depot and Lowes show that housing is alive and well despite the winter coming, and secondary housing plays like Sherwin Williams and Masco have both reported very strong earnings and forecasts.  Homebuilders, Pulte Homes and Lennar, are at all-time highs, while Toll Brothers, and KB Homes have each rallied sharply off the October lows.  The chars of each of the homebuilders is setting up nicely for a rally into years-end, and even stocks at all-time highs like Sherwin Williams and Lowes can be bought with confidence.  What is also making me bullish on the entire housing sector is the strength of the US economy.  With unemployment ticking lower, wages beginning to slowly pick up, oil prices staying considerably low (even $85-$90/barrel is low), more consumers will have money to spend on buying a new home, instead of renting or living with their parents.  My favorite names in this space is Toll Brothers if you want to be in a homebuilder and Masco if you want construction exposure, as Masco owns names such as Delta, Behr, Duraflex, and Milgard.  In short, Masco has exposure to everything from faucets and windows, to insulation and paint.  It is your ultimate housing stock. 

                  I did make a couple adjustments to my portfolio since I last wrote.  I closed out my Microsoft call options prior to expiration with a 97% gain.  I also went long December $44 calls in Mobileye and purchased Under Armour early last week.    

My current positions: Long Ford (F), Gilead Sciences (GILD), Starbucks (SBUX), Macy’s (M), Google (GOOGL), Facebook (FB), Delta Airlines (DAL), Whole Foods (WFM), Wells Fargo (WFC), General Motors (GM), ConocoPhillips (COP), Kinder Morgan (KMI), Time Warner (TWX), Palo Alto Networks (PANW), Twitter (TWTR), NXP Semiconductors (NXPI), Lockheed Martin (LMT), Darden Restaurants (DRI), Celgene (CELG), long Mobileye (MBLY) December calls, Jack In The Box (JACK), and Under Armour (UA). 

Jeff Lewison

Don't Always Believe the Analysts

11/1/14

                  Just a few short weeks ago, the S&P had fallen about 10%, crude oil was plummeting on a daily basis and Ebola was taking over the world.  What a difference a couple weeks make, with the Dow and S&P closing right at all-time highs and the Nasdaq soaring to 14-year highs on Friday.  Now that the Fed has finally ended QE3, and maintained their stance that interest rates will remain low for “a considerable time”…whatever that means, the big question is, can this stock market continue to rally, and I am under the impression that it can.  However, with stocks at all-time highs, and having rallied back about 11% over the last couple weeks, I couldn’t fault you for taking profits and trimming some of your positions that you don’t feel very strongly about. 

                  One important reason that stocks and markets move up or down is because of analyst estimates and opinions.  When you see these upgrades/downgrades, make sure to look at who is making the call, why they are making the call, and when they are making the call.  Remember…what makes a market is when different people have different opinions, and just because someone has a lot of letters behind their name, doesn’t mean they know what they are talking about.  Back on September 23, an analyst at William Blair decided that it would be a good idea to downgrade retailer, Bed Bath & Beyond (BBBY), from “outperform” to “market perform” just hours before the company reported Q2 earnings.  Now, I don’t care what the stock is, you don’t make a call in the morning on a stock that reports earnings later that day.  For me, that was a clear signal that he was setting himself up to be wrong.  On his downgrade, I decided to buy Bed Bath prior to earnings (which I almost never do), and low-and-behold, I sold the stock the next day for a 7.5% gain as the company beat expectations. 

                  One bank in particular has a real rough time in 2014…Goldman Sachs.  While they are correct on plenty of market calls, there are some that they are way off on.  Early in January, Goldman Sachs downgraded the entire biotech sector while it was sitting at all-time highs, as they are known to do.  Well, at the same time, companies like Celgene, Gilead, Biogen, Regeneron and Amgen were only in the early phases of what is quickly becoming an incredible string of game-changing successful drugs.  I however, felt that Goldman’s call was ridiculous and knowing the list of drugs that a company like Gilead had in its pipeline, added more to my position.  If you listened to Goldman’s call, you would have missed out on a 33% rally in the sector, outperforming the S&P by 24%.  While the biotech sector is red-hot and suffered a down day on Friday, there is still a great amount of upside in all of the names I mentioned, and would be looking to add on every pullback.  If you don’t want all the risk that is associated with owning individual names in the biotech sector, you can buy the IBB (iShares Biotech ETF). 

                  Unfortunately for Goldman Sachs, I am going to pick on another one of their calls, most recently when they decided to lower their price target for US crude oil to $75 by the 2^nd quarter in 2015, which is now the most bearish bet on the street.  The call came on October 27^th, which then sent crude oil to $79.44, its lowest level since May 2012.  While it’s still too early to tell if they will be right or not, I am betting on the fact that they will be wrong…again.  You see, this isn’t the first time that Goldman has made a call on crude oil, only to be wrong.  Back in June 2008, with oil sitting around $125/barrel, Goldman decided to increase their estimate to $200/barrel.  From July through the end of the year, crude oil proceeded to plummet like never before, falling 70% from the highs down to $44.60/barrel.  Goldman has also had incorrect calls on crude oil in 2011 and 2012.  Had Goldman lowered it’s outlook a few months ago, then maybe I would be inclined to believe it, but with Goldman dropping it’s 6 month price target by $15, with crude oil already having fallen 24% in the summer, I am more inclined to believe history will repeat itself.  With that, I added to my current positions in ConocoPhillips, Kinder Morgan and then opened a new position in EOG resources. 

                  One opinion in particular that really affected my portfolio was on October 24, Jim Cramer ran a segment on his Mad Money show about selling out Palo Alto Networks (PANW) because it has become to expensive.  Cramer has an unbelievable following, and has a major influence on stock prices, and when he has an entire segment devoted to selling a stock, well, that stocks is going to get hammered, which is what happened to PANW the very next day.  The stock closed right near all-time highs o $108.50 that night, only to then sell-off all the way down to $100, before bouncing back and finishing the day down about 4.5%.  For those investors who couldn’t think for themselves, they ran scared and missed an opportunity.  While the stock is still down from Cramer’s call, Palo Alto closed at its third highest level ever on Friday.  One rule of thumb on a Jim Cramer recommendation is to wait at least three days before making a decision.  Had investors done so, they probably wouldn’t have been so quick to sell (full disclosure, I did not sell any of my shares in Palo Alto Networks).

                  Now, I fully realize that I am giving you MY personal opinion and views on the markets and particular stocks, but the point is, everyone has their own opinions, including yourself.  The purpose of this newsletter is to give you various trade/investment ideas, educate you on what to look for whether technically or fundamentally, and hopefully make you a little money.  With that said, it is important to do your own research and formulate your own opinions before buying or selling anything.  But it’s also important to know that just because a “professional” analyst makes a bold prediction, it doesn’t always mean they are right, in fact, it may mean that you should do the exact opposite. 

                  I have made some changes to my portfolio over the last couple of weeks, selling out of Citibank (C) on Friday after they announced a reduction to Q3 that were reported a few weeks ago due to a legal charge.  I, personally, have lost all faith in Citibank management, and having an 8% gain, I decided to lock it in and move on.  I also sold out of Coach (COH) with a 1% loss because it never really rallied off the lows like I expected it to, and when something doesn’t do what I expect it to, I get out.  On October 23, before market-open, I opened a new position in Celgene (CELG) at $95.20 after they reported monster earnings, but didn’t react and I saw that as a great chance to get in before the rally happens.  I also took some profits in Delta Airlines, which I added to on the Ebola outbreak, and built a new position in Jack In The Box (JACK) on its long-term growth prospects and possible spin-off of Qdoba.  Lastly, I bought some calls in Microsoft prior to earnings, as a trade, which I still own.  

     

My current positions: Long Ford (F), Gilead Sciences (GILD), Starbucks (SBUX), Macy’s (M), Boeing (BA), Google (GOOGL), Facebook (FB), Delta Airlines (DAL), Biogen Idec (BIIB), Whole Foods (WFM), Wells Fargo (WFC), General Motors (GM), ConocoPhillips (COP), Kinder Morgan (KMI), Time Warner (TWX), Palo Alto Networks (PANW), Twitter (TWTR), NXP Semiconductors (NXPI), Lockheed Martin (LMT), Darden Restaurants (DRI), Celgene (CELG), long Microsoft (MSFT) November calls, and Jack In The Box (JACK). 

Jeff Lewison