Cabot Stock of the Week Issue: April 7, 2025

There have been plenty of market meltdowns over the years. Few have matched what’s happened since last Wednesday evening – so-called “Liberation Day” – when President Trump announced plans to place high tariffs on … the rest of the world. In just two and a half trading days since, stocks have nose-dived by 14%, with both the Nasdaq and Russell 2000 swinging to a bear market last Thursday and Friday and the S&P 500 on the cusp of following suit as I write this.

Losses in other major global markets around the world accelerated today, with Chinese stocks – after holding up better than most late last week – leading the sell-off on Monday, with the Hang Seng down a whopping 13.2%, its steepest one-day decline since 1997. The Nikkei was down 7.8%, the Stoxx Europe 600 off 3.5%, Toronto Stock Exchange futures reached an eight-month low before pepping up a bit at the open, etc. It’s a worldwide bloodbath. And it’s self-inflicted, utterly avoidable. Because of that, the “reciprocal” tariffs could, in theory, be reversed before they even truly take effect. But who knows what Trump will do minute to minute, let alone day to day. So it’s best to focus on the evidence of the stock market.

Sentiment has rarely been worse, volatility, as measured by the VIX, hasn’t been this high (at least on a closing basis) since the Covid crash, and more than 1,000 stocks on the New York Stock Exchange are trading at 52-week lows. That’s all historically bad. But, taking the contrarian perspective, it could mean that the worst of the selling may be nearing an end. Typically, when the number of NYSE lows tops 1,000, it coincides with a market bottom, as my colleague Clif Droke noted in his Cabot Turnaround Letter update on Friday. Super-negative investor sentiment is often a “buy” signal. And volatility has almost never stayed this high for long.

Perhaps we’re closing in on a bottom. Maybe it’s still days, weeks or even months away. The bigger-picture question is whether this market crash will mimic the February/March 2020 Covid crash, which lasted all of six weeks (technically, this crash started about six weeks ago, on February 19), or be more akin to the 2007-09 Great Recession bear market, which was a slower burn that didn’t bottom for about 16 months. The answer will likely depend on whether Trump follows through on all or most of the reciprocal tariffs he’s outlined (and whether Congress allows him to do it), and what happens to the global economy – Goldman Sachs currently puts the odds of a U.S. recession at 45%.

Until we get answers, things will remain volatile for some time. Because of that, today we’re adding the most reliable, low-volatility stock we could find from among the various Cabot newsletters from which we draw. It’s a new addition recommended by the aforementioned Clif Droke to his Cabot Turnaround Letter audience. It’s one of the few stocks out there that’s not trading at multi-month lows, mostly because it sells items everyone needs – even in a recession.

Here it is, with Clif’s thoughts.

Kenvue Inc. (KVUE)

In uncertain times like these, it’s only natural that defensive-minded investors are gravitating to healthcare stocks. After all, this space is characterized by consistent demand for essential products and services that millions rely on, regardless of the state of the economy. (Additionally, many of the companies in this category offer dividends that can be considered quite attractive during market sell-offs.)

One of those companies happens to provide products that most of us take for granted, but which are necessities nonetheless. The company in question is Kenvue (KVUE), which bills itself as “the world’s largest pure-play consumer health company by revenue” and which provides some of the world’s most famous and widely used over-the-counter consumer healthcare products.

Among its more recognizable brands are Band-Aid brand bandages, Tylenol and Motrin pain relief products, Listerine mouthwash, Neosporin antibiotic ointment, and Johnson’s baby products. Other brands include: the Neutrogena face and body care line, Nicorette smoking cessation products, Benadryl and Benylin cough and cold relief, Visine eye care, Rogaine hair regrowth treatment, plus a host of other OTC healthcare products across several categories.

The result of a Johnson & Johnson (JNJ) spinoff in May 2023, Kenvue was formed to allow its former parent company to focus on streamlining its primary operations (medicines and medical devices) while allowing Kenvue to focus on consumer products. The idea behind the spinoff—which CNBC described as “the biggest shake-up in J&J’s nearly 140-year history”—was to make both companies more “agile and flexible” (in J&J’s words) in their respective markets.

The path to reaching that goal, however, has been anything but smooth.

Shortly after its IPO in May 2023, Kenvue’s stock plummeted, driven partly by concerns over the company’s exposure to a class action lawsuit surrounding one of its key products, Tylenol. By the end of that year, however, the case against Kenvue collapsed after a summary judgment ruled in the firm’s favor in the suit, which alleged that prenatal exposure to Tylenol may contribute to autism or attention-deficit hyperactivity disorder.

While this was viewed by investors as a major victory for Kenvue—and indeed was a catalyst for reversing the stock’s decline—it should be noted that the lawsuit remains ongoing with an appeal currently pending, with an additional case in California scheduled for trial this spring.

That said, the ongoing lawsuits aren’t an immediate concern for institutional investors, which are focusing more on Kenvue’s opportunity in Tylenol as global sales of acetaminophen, the drug’s active ingredient, are projected to increase by nearly 70% between 2022 and 2032, with compound annual growth of 5% projected for that 10-year stretch.

Another major part of its turnaround strategy involves a renewed emphasis on promoting its exceptionally diverse and recognizable brand portfolio, while a further key component involves cutting costs. Management believes this will result in savings that can be reinvested in the new marketing strategies, as well as in new product development, eventually bringing about the targeted market share increases and margin expansion.

Key to the turnaround’s success is the latter metric. As one analyst observed, “The potential uplift in EBITDA margin is viewed as a crucial factor that could reverse recent financial headwinds and re-establish confidence among dividend investors and long-term shareholders.”

To that end, the company recently unveiled plans to launch 40% more new products in 2025 compared to last year, which it expects to strengthen the portfolio. It further expects net distribution gains this year, driven by a “healthy innovation lineup” and strengthened retailer partnerships, and which it sees leading to higher prominence across its brands.

Arguably for investors, however, the most important takeaway here is the added confidence of having a successful activist investor like Starboard Value (which joined Kenvue’s board in March) at the helm to guide Kenvue’s turnaround. And with Starboard’s management believing that Kenvue has “the best brand portfolio in its peer group,” it should make for an easier diagnosis of the company’s internal problems and the resulting execution of its strategic initiatives.

Additionally, the company’s dividend is a major attraction (currently a 3.5% yield), which some analysts believe could be on par with the 10-year Treasury yield in a couple of years’ time. (Kenvue is also a member of the illustrious S&P 500 Dividend Aristocrats list).

The window for this potential turnaround is roughly 12 months, and I’m placing an upside target for this stock at 30. BUY

Current Recommendations

Changes Since Last Week:

Rubrik (RBRK) Moves from Buy to Sell

Updates

We are going to scrap our normal format today, as I don’t think there’s much point in going through every single stock in our portfolio to examine how it’s performed in the last week, and what’s driving it. Virtually everything is down, and tariffs are the reason. So, instead, I’m going to highlight a couple stocks in the portfolio that warrant commentary, including one that we need to sell. Yes, I’m only selling one stock today, as fortunately we trimmed a lot of in last week’s update, selling four stocks and avoiding big losses on any of them (one of them, in fact, was sold at a big gain). Also, because our portfolio was faring so well prior to the last couple months of bloodshed, we had enormous cushions on many of them, which gave us some (though not unlimited) wiggle room.

Before I get to the highlighted stocks, a couple words of advice, as I know this is an extremely difficult market to navigate at the moment.

First, as always – and as I’ve done in recent weeks and will do again here today – cut your worst performers. Anything that’s fallen past your pain threshold, whether that’s a 10% loss, 20% loss, 30% loss, etc., it’s not worth keeping around and hoping for a comeback. Limit your losses.

Second, as I said on my Street Check podcast last Friday, don’t be a hero. The market, right now, is a falling knife, so don’t try and catch it. Trying to guess a bottom is a fool’s game. And buying stocks simply because they’ve fallen so much that you think they might not fall further is an easy way to get your hands bloody. When stocks are in freefall, they can always fall further. Best to wait until the selling stops and at least a temporary bottom has been put in. It’s better to miss the first 5-10% of an extended rally if it means avoiding another 20-30% haircut on a falling stock. As Mike Cintolo often says, the big money is often made in the next big market swing. So missing out on the first, say, tenth of that rally is a small price to pay for limiting your risk.

So, while I do maintain “Buy” ratings on some of our stocks, today is not the day to buy any of them. I recommend keeping your powder dry until current tariff fears subside. Given how quickly things seem to change in Trump 2.0, you might not have to wait long to deploy whatever cash you have on the sidelines. We’ll see.

Alright, let’s get to our highlighted stocks …

Rubrik (RBRK): Our timing was horrible on this mid-cap cybersecurity stock, originally recommended by Mike Cintolo in his Cabot Top Ten Trader momentum-based newsletter. When we added the stock to our portfolio two weeks ago, it had plenty of momentum, up 43% in two weeks. Now, it’s given back all of those gains. In fairness, it’s held monthlong support at 51 and hasn’t dipped below its March lows. But a 30% loss is more than we can stomach in what is now a bear market. Let’s cut our losses here before they get any worse. SELL

Tesla (TSLA): This is the elephant in the room in both the market and our portfolio. It’s one of the great growth stories of the last 15 years, a time during which it’s mostly been in the Stock of the Week portfolio (dating back to when it was merely Stock of the Month!), as my predecessor, the great Tim Lutts, added it (on the recommendation of the equally great Mike Cintolo in Cabot Top Ten Trader) in December 2011. It’s made a lot of people rich since then, including many readers of this very newsletter. But it’s in freefall now, both in terms of share price and public perception, thanks to its increasingly controversial founder, Elon Musk. The damage Mr. Musk has done to the brand over the last few months has been profound. The question is, having lost roughly half its value in the last four months, does TSLA – which has a long history of roaring back just when people count it out – have more upside than downside? Is the damage to the Tesla brand – with protests at Tesla dealerships across the country, people selling their Teslas, and sales declining in recent quarters – irreversible? Or, does Musk’s prominent position in the current administration’s cabinet give his company a potential leg up on other U.S.-based companies, at least over the next few years, that makes shares a bargain at these depressed levels?

Frankly, I don’t know the answer at the moment and would rather not sell this staple of our portfolio in the midst of one of the worst weeks for the market in the 21^st century. Let’s see how it behaves in a more sober environment. The good news is that, despite being down sharply this week along with just about everything else, TSLA shares are still above their March lows in the low 220s. So let’s keep this stock at Hold. As far as EV makers go, I much prefer fellow portfolio holding BYD (BYDDY). But I’m not counting TSLA out just yet. HOLD

That’s all for now. If you have questions, please don’t hestitate to email me at chris@cabotwealth.com. These are tricky times to be an investor, and I’m more than happy to help you navigate them.

Also, if you want more advice on what to do in this tariff-infested market, I highly recommend listening to the latest episode of the Street Check podcast I co-host with my colleague Brad Simmerman. Last Friday, Brad and I talked all things tariffs, what to do now, and where the market could go from here.

The next Cabot Stock of the Week issue will be published on April 14, 2025.

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