Activist Investor Jeffrey Smith’s Darden Restaurants, Inc. (DRI) Posts Strong Fiscal Q4 Results: Is It A Buy At The Moment?

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Darden Restaurants, Inc. (NYSE:DRI) reported very strong fiscal fourth quarter 2015 earnings today, as well as earnings for the company’s full fiscal year 2015, ending on May 31. The Orlando-based company’s key fourth quarter 2015 results included 13.8% year-over-year total sales growth to $1.88 billion, a 100% year-over-year increase in adjusted earnings per diluted share to $1.08, and a same-restaurant sales increase of 3.8% over the quarter. Key fiscal year 2015 results included 7.6% year-over-year total sales growth to $6.76 billion, 54% year-over-year increase in adjusted earnings per diluted share to $2.63 and same-restaurant sales increasing by 2.4% during the year. Darden Restaurants, Inc. (NYSE:DRI) also revealed its plans to split off its properties into a separate Real Estate Investment Trust (REIT). The owner of a suite of restaurants including Olive Garden and LongHorn Steakhouse is planning to create an REIT that will function as its own public-traded company. Darden Restaurants, Inc. (NYSE:DRI) is planning to transfer 430 restaurants to the REIT, which will then be leased back to Darden. Darden is planning to retire its $1 billion in debt through this transaction by the end of this year. Darden has also announced its Fiscal 2016 outlook, which did not account for the benefits from the real estate transactions. The company expects fiscal 2016 Adjusted EPS to grow by 20% to 25% and same-restaurant sales to grow by another 2% to 2.5% this fiscal year. The company is also planning to open 18 to 22 new restaurants in fiscal 2016. Hedge fund manager Jeffrey Smith‘s Starboard Value LP holds the largest position in Darden of 11.63 million shares valued at $806.7 million at the end of first quarter, and his activist campaign helped reshape the company’s leadership, and as we see, improve its results. Darden shares accounted for 16.8% of Starboard’s latest 13F portfolio.

Jeff Smith

Most investors don’t understand hedge funds and indicators that are based on hedge fund and insider activity. They ignore hedge funds because of their recent poor performance in the long-running bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns enjoyed (or not) by investors. We uncovered through extensive research that hedge funds’ long positions in small-cap stocks actually greatly outperformed the market from 1999 to 2012, and built a system around this. The 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 84 percentage points since the end of August 2012 when this system went live, returning a cumulative 142% vs. less than 58% for the S&P 500 Index (read the details). Likewise, other research (not our own) has shown insider purchases are also effective piggybacking methods for investors that lead to greater returns. That’s why we believe investors should pay attention to what hedge funds and insiders are buying and keep them apprised of this information.

Smith’s biggest achievement of 2014 was undoubtedly his successful proxy fight with Darden Restaurants, Inc. (NYSE:DRI). His presentation ripped the company’s management to shreds and managed to get the board ousted in October. On October 10, all 12 Darden board members were replaced with nominees put forth by Starboard. Since this change, Darden’s stock has gone up by around 35%, and by over 1% today on the latest earnings results.

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Overall hedge fund sentiment is strongly positive for this stock as the number of hedge fund positions in the stock increased to 29 at the end of first quarter from 22 at the end of fourth quarter. This is a 32% change in the hedge fund positions in the stock in the first quarter. Aggregate capital invested by hedge funds also increased to $1.06 billion by the end of first quarter from $861.9 million at the end of the fourth quarter. This is a 20% increase in the investment by hedge funds in the quarter, though Darden’s stock rose by nearly this much during the quarter, so the gain is a little less significant than it appears. Nonetheless, Hedge funds are positive on the stock.

There was one insider purchase of the stock in the second quarter. CEO of Darden Restaurants, Inc. (NYSE:DRI), Eugene Lee purchased 7,600 Darden shares in April. There were a few insider sales in the first quarter as well, with CFO Bradford Richmond selling around 70,000 shares in the first quarter. SVP Lothrop David and the President of Longhorn Steakhouse, Valerie Insignares also sold around 18,000 and 20,000 shares respectively in the first quarter. Insider purchase always outweighs any insider sales, so a purchase by the CEO of the company denotes positive insider sentiment on the stock.

With all of this in mind, let’s view the fresh hedge fund activity on Darden Restaurants, Inc. (NYSE:DRI).

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