Sprouts, Darden Offer High-Upside Setups for Risk-Takers

Key Points

• Both Sprouts Farmers Market and Darden Restaurants have sold off heavily in recent weeks.
• With the RSI for each stock now at multi-year lows, the setups are compelling for risk-hungry investors.
• Continuing analyst support and double-digit upside targets mean these are falling knives that just might be worth catching.

With the major equity indices continuing to sit around record highs, you’d be forgiven for thinking it’s been smooth sailing for investors. But dig a little deeper, especially in non-tech names, and plenty of individual stocks are being punished. For investors with an appetite for risk and contrarians, that’s often where the biggest opportunity can be lying.

As Wall Street likes to say, trying to “catch a falling knife” can be risky, but the payoff can be huge if you time it right. Two stocks that now fit that bill are Sprouts Farmers Market Inc. NASDAQ: SFM and Darden Restaurants Inc. NYSE: DRI. 

Investors have sold both hard in recent weeks, pushing their relative strength index (RSI) readings down to extremes not seen in years. For investors who like to buy when others are running for the exits, each offers a setup that’s worth a closer look.

Sprouts Farmers Market: Oversold to Multi-Year Extremes

Sprouts has been in freefall since June, losing about 35% of its value and hitting fresh lows again in Wednesday’s session. The selloff has pushed its RSI below 18, the most oversold it’s been in over five years.

The decline is notable because Sprouts has continued to deliver on its fundamentals. Its most recent quarterly report saw revenue and EPS come in ahead of consensus, with comparable store sales climbing quickly. 

The company also recently announced a $1 billion share repurchase program, a clear sign management sees value in the stock at these levels.

At just $115 right now, shares are trading well below the updated analyst ratings and targets from recent weeks. In upgrading them to Overweight last month, Wells Fargo also gave Sprouts Farmers Market a fresh $180 price target, while Evercore ISI went even more bullish with a $190 target.

From where the stock closed on Wednesday evening, both suggest there’s more than 50% upside if the company can steady the ship. 

However, the risk here is obvious: the stock is still sliding and hasn’t found a base. But at the same time, RSI readings this extreme are rare, and historically they’ve often marked turning points. Could fortune be inclined to favor the bold? 

Darden Restaurants: Analyst Support Strengthens

Shares of Darden, the parent company of Olive Garden, have been down 20% since June following a lacklustre summer. Last week's disappointing Q1 earnings report, which included disappointing headline numbers, added to their woes and sent the stock tumbling another 10%.

The post-earnings slide has now dragged its RSI down to 20, its lowest level in more than five years.

However, there’s a sense that though the selloff has been driven by valid concerns on margins, the worst of it may already be priced in.

Sure, investors are worried higher costs will continue to squeeze profitability, but many on Wall Street are taking the opposite view. 

After last week's report, the teams at Deutsche Bank, Morgan Stanley, and Evercore ISI have all reiterated their Buy or equivalent ratings, pointing out that Darden’s scale, pricing flexibility, and cost discipline leave it well-positioned to keep growing.

Refreshed price targets now range as high as $240, which implies nearly 30% upside from where shares closed on Wednesday. And unlike Sprouts’ much grimmer-looking setup, Darden shares already look to be consolidating after the drop.

That makes it particularly interesting for investors who prefer some evidence that the worst of the selling pressure may have passed before jumping in. 

The Macro Environment Remains Favorable

At first glance, the charts of either stock might well scream “stay away”. But they’re actually each offering exactly the kind of setup that contrarian investors love to see.  

The broader backdrop matters too. With interest rates falling and the major indices sitting at, or near, record highs, there’s a strong risk-on sentiment in place. Investors are showing a clear willingness to chase opportunities with asymmetric upside, and both Sprouts and Darden fit neatly into that bucket.