RBC Says to Buy the Dip On Darden Restaurants Stock

DRI lost more than 11% in the first three months of the year

by Josh Selway

Published on Apr 2, 2018 at 9:12 AM

Two weeks ago shares of Olive Garden parent Darden Restaurants, Inc. (NYSE:DRI) suffered a major post-earnings bear gap, and as a result closed the first quarter down 11.2%. Brokerage firm RBC, however, is viewing this pullback as a buying opportunity, upgrading DRI stock this morning to "outperform" from "sector perform" and lifting its price target to $97 from $93. The shares are set to open up 1.5% at $86.49, based on pre-market action.

There are a number of signs the bullish call could be a savvy one, too. First of all, Darden has been a strong performer on the charts on a long-term basis, roughly doubling in value over the past four years. Maybe more notably, the equity has historically outperformed in the second quarter, gaining 13.5% on average during the period over the past 10 years. In fact, DRI has only closed the second quarter in negative territory once in the last decade.

Aside from the favorable seasonality, the shares have seemingly found a solid area of technical support. For instance, they closed last week just above the $85 mark, which equals a roughly 15% discount to their January record high of $100.10. This area also acted as technical resistance from late July to early December of last year, and if that's not enough, the rising 320-day moving average has also moved into this region.

dri stock

Meanwhile, other analysts are split on the restaurant stock, with half the brokerage firms in coverage handing out "strong buy" ratings and the other half saying DRI is a "hold" or "sell." Options traders on the other hand have been decidedly bearish, based on the security's 10-day put/call volume ratio of 4.72 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This reading ranks just 4 percentage points from a 12-month high, showing an unusual interest in long puts lately.

Options traders aren't the only skeptics out there. Short interest jumped 22% in the last two reporting periods after touching a multi-year low in February. Based on average daily volumes it would take these bears more than a week to cover their positions.

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