Stick With Strong, Accessible Brands in a Slowing Economy

Investors are more than willing to place trades outside their comfort zone in a bull market. But in a slowing economy, they tend to gravitate towards the tried and true. That explains the relative outperformance of value stocks in a flat or sideways market.

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  • Investors do the same thing as consumers. They cut back on new products and services, and stick with what’s tried and true. That’s why there are so many brands out there – including those at a reasonable price.

    The most recent economic data shows a slowdown in restaurant spending. But even in a slow economy, going out to dine can be a small luxury. But that trend tends to benefit reasonably priced and well-known restaurants over flashy concept places – especially expensive ones.

    That’s why some analysts see restaurant chain Darden Restaurants (DRI) performing well from here. The owner of Olive Garden, LongHorn Steakhouse, and Capital Grille, among others, offers a fine experience without high-end prices.

    Shares are likewise reasonably valued, at 16 times forward earnings. And revenues grew by 9 percent last year, as the chain was able to raise prices to offset higher food costs. That may explain why Darden rose 14 percent over the past year, while the S&P 500 shed 10 percent.

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  • Action to take: Shares are a reasonable buy at today’s prices. And with a current dividend yield of 3.3 percent, investors are getting paid well to own a series of popular chains.

    For traders, the July $160 calls, last going for about $4.35, offer mid-double-digit returns in the months ahead.


    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.

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