NEW YORK (TheStreet) -- Darden Restaurants (DRI) -- the parent company of Olive Garden, LongHorn Steakhouse, Bahama Breeze and The Capital Grille -- has become a momentum stock after it had been bound in a two-year trading range. With that in mind, investors should trade the shares employing exit strategies. Here's the backdrop.
The company had missed or just matched analysts' earnings-per-share estimates since the quarter ended in May 2013. That resulted in a trading range from a high of $55.25 on June 10, 2013 to a low of $44.78 on Sept. 23, 2013. The stock ended 2013 at $54.37.
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For Darden, 2014 was a year of cost cutting. That included a deal announced in May to sell Red Lobster to Golden Gate Capital for $2.1 billion. Darden, though, still reported lower-than-expected earnings in June, and the stock declined to a two-year low at $43.56 on July 17. Then, the stock began a momentum run of 35% to an all-time intraday high at $58.90 on Dec. 8.
Darden is scheduled to report its latest quarterly results before the opening bell on Tuesday. Analysts estimate the company will post earnings 27 cents a share, along with lower revenue. With Darden still on a cost-cutting diet, the stock's momentum could be in jeopardy. Fewer free breadsticks at Olive Garden and competition from fast-casual chains such as high-flying Chipotle Mexican Grill (CMG) should encourage investors in Darden to consider an exit strategy.
Investors who are looking to buy Darden ($57.38) on weakness should enter a good 'til canceled limit order to buy at key technical levels of $48.40 and $44.50, while investors who are looking to sell should enter a good 'til canceled limit order to sell on strength at a key technical level of $59.15. Another exit strategy is to place a sell-stop order below the key weekly moving average of $55.03, while keeping in mind that this average will be rising each week.
Here's the daily chart for Darden.
Courtesy of MetaStock Xenith
The daily chart for Darden shows the rebound of 35% from the July 17 low at $43.56 to the Dec. 8 all-time intraday high at $58.90. The momentum journey solidified when the stock held its 200-day simple moving average (green line) at $48.87 on Oct. 31. The moving average is now at $49.81.
Here's the weekly chart for Darden.
Courtesy of MetaStock Xenith
The weekly chart for Darden shows that the stock tested its 200-week simple moving average (green line) in January 2013 when the average was $44.32. That lined up with the low end of the stock's two-year trading range. The shares have been trading back and forth around their 200-week SMA since then, and have been above it since the week of Oct. 24 with this moving average now at $49.57.
The weekly chart is positive but overbought with its key weekly moving average at $55.03. The momentum reading shown in red at the bottom of the graph is at $92.19, which is an extremely overbought reading versus the overbought threshold at $80.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates DARDEN RESTAURANTS INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate DARDEN RESTAURANTS INC (DRI) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, compelling growth in net income and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including disappointing return on equity, weak operating cash flow and poor profit margins."
You can view the full analysis from the report here: DRI Ratings Report