Texas Roadhouse (TXRH): A new leading stock at new highs

By Michael Cintolo, Chief Analyst, Cabot Growth Investor and Cabot Top Ten Trader
From Cabot Wealth Advisory 3/24/16 Sign up for Cabot Wealth Advisory—it’s free!

Most growth stocks are still on their launching pads, which I think is a good thing, at least for now. If the market strengthens from here, my guess is we’ll see some rotation into exciting new growth ideas.

That said, I’m also seeing many “follow-on” opportunities in growth stocks—names that soared to new price highs in recent weeks (often following a great earnings report) and have since traded very tightly on light volume … a constructive sign that higher prices are ahead.

A perfect example of this is Texas Roadhouse (TXRH), a steady cookie-cutter story. Here’s what I wrote about the stock in Cabot Top Ten Trader back on February 29:

“The new trend in the restaurant industry is fast-casual, but Texas Roadhouse is doing great business in the full-service arena, offering an assortment of steaks, ribs, chicken, pulled pork and the like, along with unlimited in-shell peanuts and yummy made-from-scratch rolls. The stock has been a long-term winner as earnings have cranked higher many years in a row, and is strong today as the fourth-quarter report topped expectations and most investors expect 2016 to show a marked acceleration in earnings growth (partly thanks to falling food costs). In the fourth quarter, margins rose 1.1% from the year before, while same-store sales growth rose more than 4%. And analysts see more where that came from: revenues are expected to rise 12%, but earnings are expected to rise 25% thanks to falling costs (1% to 2% food deflation) and a modest share buyback program. (The company also pays a decent 1.6% dividend, which has been raised for five straight years.) As for footprint, Texas Roadhouse has 485 restaurants open, and plans to add about 37 new locations and should have plenty of room for growth from there. It’s not the fastest growing cookie-cutter concept, but management has pulled the right levers for years and there’s no reason to think that will change.”

The stock soared after its fourth-quarter report, gapping to new highs on six times average volume near the end of February. And since then, TXRH has traded very tightly, moving straight sideways on the chart on low volume. A short-term shakeout is always possible, but this action is very constructive and should lead to higher prices. I think TXRH is buyable here or on dips of a point or two, with a stop near 38.

For more momentum stocks featured in Cabot Top Ten Trader, click here. The advisory has a 97% win ratio year-to-date and handed our investors 62 winning trades since the beginning of the year.