Tonight, I'm going to talk to you about a couple of fallacies that come together with one stock as the perfect illustration of what's wrong with both...

And that stock is... Darden Restaurants Inc. (DRI)

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The first fallacy is what I call, it's-just-too-cheap, it's-gone-down-too-much fallacy...

And the second is the fallacy of ethanol which, despite the fact that the Iowa caucuses are over and won by two non-establishment candidate... will stay in favor with the U.S. government, even though it doesn't make one wit of sense...

We want to understand both these things... so let's go to the tape...

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On December 18th, DRI - which you know as the Red Lobster and the Olive Garden... the stock closed at $36 that day.  The next morning, it missed earnings by 9 cents... but it was unbelievable, because it lowered their guidance for the year, and then the stock opened at $31.72, and closed even lower, at $28.60.

It's been slammed even lower since then.

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All right, let's take a look at this 3-month chart... let's go to the tape...

You look at that decline, and you have to say to yourself, this market has overreacted.  I mean, hasn't this stock become way too cheap?...

DRI's now trading at about 9x earnings.  It's historic price-to-earnings (P/E) is twice that.  It's gone so low that it's dividend yield is a healthy and attractive 2.7%.

No matter what problems they may be having - and they've got some problems - this is a stock that, frankly, looks undervalued, right?  It looks too cheap...

That's what I first thought, when I gave it a preliminary look...

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But 'too cheap' means nothing in this difficult market...

DRI looks, to me, like a stock that's too cheap, that has no reason to go higher... and that's really all that matters...

The problem with this chain is that it's all domestic, and that's bad...  This is not a stock that is too cheap... It's a stock that's making the long transition from growth investors - who are willing to pay up for a stock, meaning to pay a high price-to-earnings multiple, because it delivers healthy, consistent growth...  DRI can't do that anymore...

Now it's transitioning to having value investors, who are willing to pay much less.

Here's the problem...  This transition can take years and years, no matter how cheap DRI might look now, I think it could be even cheaper in six months...

I have to believe there are downgrades and estimate cuts coming.  You know those drive stocks lower...  and another bad quarter?...  Only one analyst has a 'sell' on the stock right now, and they normally downgrade only after the stock has gotten a haircut or - in DRI's case - a beheading...

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But DRI is also an example from the horrible fallout from our obsession - our national obsession, right from the President, through all politicians - of ethanol... the ethanol craze.

DRI is the reason why ethanol is just plain dumb, frankly.  I certainly don't think it's going to solve our energy crisis.  It's creating an expensive food crisis for the everyday person. 

It's not even energy efficient...  It produces only about 30% more energy than it consumes.

It uses a tremendous amount of water, which is a precious resource.  That's not going to do anything for us, except jack up the price of grain, and ruin DRI and other restaurant stocks like it.  It's too expensive for you...

All this to appease caucus voters in Iowa and Senators in farm states who want to keep the fat subsidies coming.  There is no economic reason for it.

I believe passionately in a government of, for and by the corporation, but that means corporations like DRI deserve a voice just as much as the ag complex that's done so well off of our idiot, ill-fated love affair with ethanol.

So, even though we like DRI's management... even though we like to eat at the Olive Garden... and even though the stock looks cheap, it just isn't enough to buy this once-great company, now brought low by ethanol...

And remember, Danny Meyer totally dissed this company as simply not interesting.  He's our great restauranteur that we used to discover Chipotle (CMG)  It's not compelling.  It's totally cookie cutter...

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