A major headwind for Texas Roadhouse may be easing. Here’s what the charts have to say
Texas Roadhouse’s compelling growth story ran into the wall of soaring beef prices this summer — a real problem for a steakhouse chain that prides itself on offering diners a tasty but affordable meal. Signs of relief have finally appeared in the cattle futures market, though, giving us reason to start warming back up to Texas Roadhouse’s stock. Accordingly, we added to our position on Tuesday for the first time in a month. We’ve now bought back all 80 shares of Texas Roadhouse that we sold at higher prices back in May. With cattle prices starting to roll over in September, this is a perfect opportunity to do some technical analysis and get a better sense of how — and why — we think the price dynamic of live cattle futures translates into the price action of Texas Roadhouse shares. Why we bought Let’s start by taking a look the chart below of Texas Roadhouse’s stock performance over the past 12 months (shaded in blue). We can see we’re already at a key buy level — the stock is trading around the same prices it did in April immediately following President Donald Trump’s reciprocal tariff announcement. At that point, not only was the news flow bad — and about to get even worse in terms of the tariff rates on Chinese imports — but it was also a surprise that sent the market into panic over the future of the U.S. economy. As a result of that emotional selling, we saw even lower levels in the days ahead, with the stock bottoming out at around the $153 level. Another reason to be feeling better about Texas Roadhouse is the relative strength index (RSI), a momentum indicator that traders use to determine whether a stock has moved too far, too fast in either direction. As shown in the expanded chart below, Texas Roadhouse’s RSI is now reading at just below the 30 level, which indicates oversold conditions; anything above 70, by contrast, is overbought. Notably, the stock’s RSI is marginally lower than the level we saw when the stock bottomed in the days following the tariff announcement. Of course, a stock trading near prior lows does not mean it is done going down. Indeed, bearish traders in Texas Roadhouse, focused strictly on the technical setup, would not be wrong to call out that 50-day and 200-day simple moving averages have now formed what technical analysts refer to as a “death cross.” That is the opposite of a bullish “golden cross.” So why doesn’t that bearish pattern scare us away? Because, at the end of the day, what we care about most at the Club is the fundamentals, and a major headwind for Texas Roadhouse is starting to look like a tailwind. As we see it, here’s the fundamental setup: The U.S. economy has thus far remained resilient, supporting the demand side of people going out to eat. While consumer health requires monitoring because things can always change, spending has hung in there to date. Take it from the CEO of fellow Club name Wells Fargo , Charlie Scharf, who appeared on CNBC on Wednesday morning to discuss the state of the economy and consumer. “In our own data, things are remarkably stable… Consumer spend continues at the same year-over-year pace across almost all wealth levels,” Scharf said. Recall, the last time Texas Roadhouse reported, the issue was not with demand — same-store sales growth was strong at 5.8% and persisting at a healthy clip in first few weeks of the ongoing quarter. The issue was on the supply side, as inflated beef prices were pressuring margins and forced the company to raise its commodity inflation guidance for the year. A closer look at cattle This is where the positive news has started to emerge. Pulling up the chart of live cattle futures, what we see over the past couple of days is a down move made on elevated trading volume (price is in the shaded blue area, volume is in the bottom third of the chart). Now while some may argue that the uptrend remains intact, we have to be mindful that live cattle is a commodity. As such, it is not priced on a financial metric such as earnings. Rather, the price is based what someone else is willing to pay for the commodity. Technically, in this case, given we are talking about futures, it is priced based on what someone is willing to pay at some point in the future. In a sense, this dynamic makes it so there’s a limit on how quickly prices can rise and continue to rise. A stock can see its price keep climbing — or even surge, like we’re seeing Wednesday with Oracle — without actually getting more expensive on a price-to-earnings basis over time due to profit growth and even the expectations of more profit growth in the future. Cattle prices, on the other hand, are ultimately going to be limited by how much someone is willing to pay for a steak or burger — even if there are fundamental reasons like tight cattle supplies that kicked off the big price increase we’ve seen. Folks may be willing to pay more for a burger or steak over a long period of time, but they’re only going to be willing to pay so much more in one year than they did the year prior. That is especially true when the underlying commodity has a short shelf life and there are viable protein source alternatives. Against this backdrop, we are looking for the recent slide in cattle prices to continue. And as they decline, we expect buyers to step back into Texas Roadhouse shares. Just as the rise in beef prices crunched margins, their decline should serve up margin expansion. The correlation This dynamic can be illustrated through a chart combining the price dynamics of live cattle futures and Texas Roadhouse. That gives us a sense of the correlation we’ve seen year to date. Focus on the green line, which represents the price movement of live cattle futures. What we see lately is that when it’s rising, Texas Roadhouse (the blue line) comes under pressure. The exception is in the period of time shortly after the worst of the reciprocal tariff announcement fallout — that was essentially an “everything” rally in the broader market during that timeframe. Just as emotional selling can take everything down, panic buying like we saw when President Trump start to walk back the worst of the tariff rhetoric, can bring everything up. The negative correlation is particularly notable coming out of that period. We did a correlation analysis between Texas Roadhouse’s stock price and live cattle futures from May 15 to present, and that resulted in a correlation of minus 0.83. A quick statistics refresh: Correlations can be between minus 1 (a perfectly negative relationship) and plus 1 (a perfectly positive relationship). A minus 0.83 correlation is considered a pretty strong negative relationship, meaning that a rise in live cattle futures is associated with a decline in the stock price of Texas Roadhouse. As our chart shows, after both cattle prices and Texas Roadhouse traded sideways for a few weeks as investors tried to absorb all the new information, we quickly see them diverge. Cattle prices rallied and shares tanked. The move we saw in response to earnings in August earnings was simply a continuation of that trend as the impact of the beef price inflation became crystal clear. Now, in recent days, we are seeing both cattle prices and Texas Roadhouse shares come down. However, that lag is not abnormal as investors need to come around to the idea that cattle prices are indeed rolling over. We also have to account for the fact that we are talking about futures here, not spot prices. As a result, we will not see the decline in prices show up overnight in Texas Roadhouse’s financial performance. Nonetheless, should we be proven correct in our view on cattle futures, we think the negative correlation holds and we see Texas Roadhouse start to get bought up as cattle prices move lower. Finally, we want to call out valuation. At roughly 23 times forward earnings estimates, the stock is the cheapest we have seen since January 2024 — the April lows being the only exception, when shares traded down to just over 21 times earnings. We will actually be below that, at around 20.5 times 2026 estimates, should we trade down to the April bottom level of $153. So, with the tariff picture much less uncertain than we were facing in early April and cattle prices looking as though they are starting to roll over, we believe the area between current prices and the $153 level is great place to start building a position. (Jim Cramer’s Charitable Trust is long TXRH. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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