The old idea of simple buy-and-hold investing works only with the minority of companies that consistently create shareholder value. Even then, they are subject to the vagaries of the market. Broad sell-offs like we experienced in 2008 to 2009 knocked down even the very best stocks.

Darden’s (DRI) long-term growth record has been excellent. Fiscal year 2007 (ended May 30, 2007) saw $2.53 in EPS and $0.46 in annual dividends. Fiscal Year 2012 came in with 41.8% higher earnings and $1.86 in yield.

Dividend growth investors had a love fest with this one ever since the spin-off from General Mills back in May, 1995. Darden’s recent swan dive from almost $58 to Wednesday’s $47.20 has brought the stock back to just below where it was trading on June 18, 2007. This fine company’s shares have now completed a 66-month round trip to nowhere.



What can be learned from the chart above? Plenty. Value Line notes that Darden has a 10-year median P/E of 14. Buyers back at 2007’s peak paid too much. At 18.8x trailing earnings and less than a 1% yield the stock was too richly valued to expect good returns.

The high points of 2011 and 2012 were also set with DRI trading for above normal valuations based on Darden’s own trading history. It is not surprising that the stock underperformed from those moments in time, designated with red stars on the chart.

Conversely, the three great buying opportunities, marked with green stars, all occurred at bargain multiples with generous yields of from 4.22% to 5.45%.

The biggest takeaway is the obvious one. Profits were made on the "buy." Traders just couldn’t be sure how well they’d done until they finally sold.

I’m not keen on the macro-environment for the casual dining industry at present. Economic weakness, upcoming employee health care cost increases and food price inflation are all straining profit margins. Couponing has been prevalent although Olive Gardens, Red Lobster and other Darden brands have avoided the dreaded Groupon so far.



A further sell-off to around the $42 to $44 mark might discount the entry price enough to make even a doubter give Darden a shot again. That would represent a still-secure yield of 4.5% to 4.8% and a P/E near 11.5x.

That would take Darden back to a valuation better than anything since the past recession’s low points. Keep an eye on DRI and hope for another step downward to allow for starting a new position.

The Trade: Place limit orders to Buy DRI in the $42 to $44 range.

Disclosure: No position

The Strategy of Ben Graham – Warren Buffett’s Mentor

From 1923 to 1957 Warren Buffett’s mentor, Ben Graham, followed a strategy of investing in net-nets. He said: “It always seemed, and still seems ridiculously simple to say that if one can acquire a diversified group of common stocks at a price less than the...net current assets alone…the results should be quite satisfactory. They were so in our experience, for more than 30 years.”
Today net-nets are rare. They are collected under GuruFocus’ Net-Net Screener. GuruFocus also publishes a monthly newsletter which recommends the safest net-nets. All of these are included in GuruFocus Premium Membership.

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