Beating the Blues: Darden Restaurants and Genomic Health
Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It's a tough market to be searching for confidence-boosting stocks, but a few candidates are doing their bit. These are two stocks which were able to break to new multi-year highs on higher volume last week. Both have held up well to the selling in the broader market and both are well positioned to lead when buyers make their eventual return.
Darden Restaurants (NYSE: DRI) made a break for freedom on Wednesday before it was pegged back as the hangover kicked in. The newswires were unusually quiet on the trigger with Q4 earnings not due for another month. Even when you consider past earnings it doesn't stray from analyst expectations. Competitors like Yum! Brands and McDonald's, which released their quarterly results in late April, didn't knock it out of the park either; Yum! beating by a few pennies but McDonald's coming in a shade below.
Darden has retained its earnings by spending aggressively on advertising, something competitor Ruby Tuesday has found difficult to match. It is this process of advertising "value" while raising prices that has helped it retain its earnings growth. The trade-off is customer loyalty; its Olive Garden brand has seen declining margins for a number of months as market share is traded for higher costs at the table. However, the company has also adopted some unique practices to combat increasing food costs, such as building the world's first commercial lobster farm in Malaysia (for its Red Lobster brand). In addition, the recent softening in commodity prices will help boost the company's bottom line.
None of this explains last Wednesday's surge in price, but in tricky times there is a natural affection for defensive sectors. Casual Dining is one of the few growth areas in the current Recession. Within the Restaurant sector, 'fast-casual' dining was the strongest performer sub-sector in 2011. Strength in 'fast-casual' dining clearly shows a willingness on the part of consumers to seek out "Value," something Darden has been very successful in marketing. Factor in Darden's current P/E of 15.1 and you have a 25% discount compared to a competitor's average of 20.6. If you play the match up against 'Fast-Casual' leaders like Chipotle Mexican Grill, the result is more favorable (P/E of 53.8). The resilience to last week's selling is another clear sign of demand for the stock and an opportunity for the patient.
Jumping from restaurants to healthcare, Genomic Health (NASDAQ: GHDX) made its move late last week into Monday after it rallied from $28 to $35; but it has since pegged itself back. It's a bit of an earnings roller-coaster, veering wildly from analyst expectations with either a small gain or loss; in its most recent quarter it was able to report a $0.02 gain against an expected loss of -0.03. Certainly that surprise was enough to trigger the push to $35, but it would appear every quarterly earnings report is a surprise one way or the other.
So what has been driving the broader rally from $12 in 2010? One of the standouts has been the buying by insiders; the most recent purchase to hit the headlines was the 376,000 shares bought by Director Julian Baker, but insider buying has remained consistent for a number of months. Insider purchases for the last six months tallied at 918,000 shares compared to 174,000 sold. In addition, institutional buying has increased over the past six months (but decreased quarter-to-quarter) to about 3 million shares, which represents about 11% of the float.
The higher than expected net income for the last quarter was attributed to Medicare payments for its colon test, although the company expects to report a net loss for Q2 due to seasonal factors and increased operating expenses. An interesting nugget in the latest earnings report was a distribution agreement for its Onctotype DX for breast cancer in Mexico and Russia. The rate of Breast Cancer in Mexico was once low but it's now the most commonly diagnosed cancer in Mexican women. Likewise, the incidence of Breast Cancer is currently lower in Russia than in the U.S., but unfortunately the survival rate for Russian women is less. In both countries, there is need for improved detection and treatment which Genomic Health can help fill.
Insider confidence combined with new market opportunities sets solid ground work for continued price appreciation. The hot-and-heavy P/E of 113 is not unusual for a stock in this sector; competitor Hologic supports a P/E of 100. The stock's P/E will fall as as new revenue opportunities come on stream. The stock is holding $32 and this offers a good starting point for building a position.
fallond has no positions in the stocks mentioned above. The Motley Fool owns shares of Darden Restaurants. Motley Fool newsletter services recommend Genomic Health. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.