Cabot Value Investor Issue: June 5, 2025

Post-Covid Lag in Valuations Means Opportunities Abound for Stock Pickers

For value investors, a clear theme has emerged in the post-Covid era: While most industries have made full recoveries from the two-ish years when the world was shut down, far fewer stocks have. Growth stocks led the charge out of Covid, with the rally commencing almost immediately after worldwide lockdowns were enacted and people started doing all their shopping (and schooling, and social interactions, and exercising, etc.) online, resulting in a huge boom for opportunistic relative upstarts – i.e. growth stocks – like Chegg (CHGG), Peloton (PTON) and Zoom (ZM).

Then, government stimulus checks were mailed to every American, and the appetite for risk went into overdrive, birthing the meme stock craze of early 2021, sending bitcoin and other forms of cryptocurrency into the mainstream, and giving previously unheard-of assets like SPACs and NFTs their 15 minutes of fame. Value wasn’t completely ignored – the 2020-2021 rally lifted all boats – but the gap between the performance in value and growth became a Grand Canyon-esque chasm. From the March 2020 Covid crash bottom to the end of 2021, the Vanguard Value Index Fund (VTV) was up a very impressive 65%. The Nasdaq more than doubled that performance, though, up more than 130% from trough to peak.

The 2022 bear market, brought on by decades-high inflation and global supply-chain issues not seen since World War II, threw cold water on the rally, and stocks of all stripes were taken down a peg (or several pegs, for stocks like the three Covid darlings listed above). Then, inflation subsided, supply chains improved, the global economy strengthened, and a new, far less widespread bull market emerged, led by the since-dubbed “Magnificent 7.” Most stocks, growth and value, didn’t participate in the rally in 2023 and much of 2024, with the Mag 7 doing most of the heavy lifting in carrying the big-cap indexes to consecutive years of 20%-plus gains.

That brings us to this year … and tariffs. Tariffs are clearly not the stock market’s cup of tea, with economists almost universally condemning them as potentially damaging to the U.S. economy, warning of spiking inflation, recession, or both. So far, the U.S. economy has mostly held up, with corporate earnings notching two straight quarters of double-digit growth, jobs numbers (mostly) holding steady and inflation sinking to four-year lows.

But the threat of tariffs hasn’t gone away, and the dichotomy between still-strong “hard data” and plummeting “soft data” (i.e. consumer and investor confidence reaching multi-decade lows, underwhelming full-year earnings guidance, etc.) has created an environment in which investors aren’t sure what to do—hence the a flat market (net-net) through the first five months of the year.

But value stocks, for the first time in more than a decade, are outperforming growth stocks, if only slightly: The VTV is up 2% year to date, while the Nasdaq is up half a percent. Why? As my colleague Mike Cintolo often writes, relatively few leaders have emerged in the growth stock realm. There are few Zooms, Pelotons or Cheggs like in 2020, and the Mag 7 have become underperformers, down 3% collectively this year. The market isn’t imploding the way it did in 2022, but it’s directionless, “blah.” Instead, it has become a “stock picker’s market” – a euphemism often used for flat markets like this one.

Thankfully, there are plenty of good stocks value stocks to pick from. Because so much of investors’ attention the last two years was centered on maybe a couple dozen Mag 7 and artificial intelligence-related stocks, many sectors and subsectors remain undervalued—and yet, the industries to which they belong are making more money than ever. That’s true of the travel industry, where people are flying in planes, booking hotels and taking cruises like never before. Their stocks weren’t keeping pace, however, and we pounced at just the right time, turning United Airlines (UAL) and, just last month, Carnival Corp. (CCL) into very quick winners. We own a couple retailers in the Cabot Value Investor portfolio (The Cheesecake Factory (CAKE) and Dick’s Sporting Goods (DKS)) based on the same premise. Now, it’s time to apply that same rationale to another undervalued sector that is currently a blind spot in our portfolio: industrials.

Industrials stagnated like everything else during Covid, but now many of them are churning out revenue like never before. And while the performance among industrial stocks hasn’t been “bad” – they’re up 45% since the start of 2023 – they also aren’t setting the world on fire. So, in keeping with the stock picker’s market theme, today we dip into the mixed bag of industrial stocks by selecting a name whose revenue and earnings are growing faster than its peers, but whose stock is only now starting to play catch-up.

New Recommendation

KBR, Inc. (KBR)

Formed in 1998 when M.W. Kellogg merged with the construction wing of Halliburton, KBR (short for Kellogg Brown & Root) is an industrial conglomerate that has its hand in a lot of big revenue-generating pies – aerospace, defense, energy, engineering and intelligence. Its Government Solutions segment provides support for agencies including NASA, militaries in the U.S., U.K., and Australia, among others, and infrastructure projects from Indonesia to the Middle East. Its Sustainable Technology Solutions segment helps engineer energy projects, helps companies and governments transition to more sustainable forms of energy, and provides energy security solutions in markets like the Middle East. KBR also dabbles in cybersecurity, national security solutions, surveillance, global supply chain management, data analytics and much more.

As with most industrials, business slowed to a crawl in the aftermath of Covid due in large part to supply-chain issues. After peaking at $7.3 billion in revenue in 2021, sales dipped to the $6 billion range in 2022 and 2023. Last year, however, brought a new record high of $7.74 billion; this year, the analysts see revenues at $8.76 billion, a 13% improvement, and stretching to $9.5 billion in revenue next year. And after failing to turn a profit in 2023, the company is on track for a record $3.85 in EPS this year (up 15% from 2024) and $4.27 next year.

Increased defense spending not only in the U.S. but around the world should act as a tailwind, according to management on the company’s first-quarter earnings call. Countries around the world transitioning to sustainable energy is another catalyst. And as the race to space accelerates, so will KBR’s role in facilitating it.

KBR came public in 2006 after being spun off from Halliburton. And while there have been many ups and downs, the stock found its groove before and during Covid, more than tripling in four years from early 2018 to early 2022. It topped out at 56 in April of that year, pulled back to 43 by that September as revenues tailed off, and recovered to new highs above 65 by mid-2023. After pulling back late that year, the stock again rocketed to new highs, peaking at 72 last November. But tariff fears and other factors knocked it all the way back to 46 this April. It has since rebounded as high as 56, but currently trades at 52 a share. At 13.7x earnings and 0.87x sales, the stock has rarely been cheaper, trading well below its five-year averages (forward P/E of 18.5, price-to-sales north of 1.0). To get back to those averages, the stock would have to rally to its 72 peak from last November. I think that’s a good price target, giving us roughly 38% upside from here.

Because the stock pays a modest dividend (1.3% yield at current prices), let’s put KBR in our Growth & Income Portfolio. BUY

This Week’s Portfolio Changes

None

Last Week’s Portfolio Changes

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Upcoming Earnings Reports

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Note to new subscribers: You can find additional commentary on past earnings reports and other news on recommended companies in prior editions and weekly updates of the Cabot Value Investor on the Cabot website.

Send questions and comments to chris@cabotwealth.com.

Also, please join me and my colleague Brad Simmerman on our weekly investment podcast, Cabot Street Check. You can find it wherever you get your podcasts, or you can watch us on the Cabot Wealth Network YouTube channel.

Growth & Income Portfolio

Growth & Income Portfolio stocks are generally higher-quality, larger-cap companies that have fallen out of favor. They usually have some combination of attractive earnings growth and an above-average dividend yield. Risk levels tend to be relatively moderate, with reasonable debt levels and modest share valuations.

Aegon Ltd. (AEG) is a mid-cap ($11.4 billion) Dutch life insurance and financial services company that’s nearly 180 years old. Its largest and perhaps most recognizable business is Transamerica, a leading provider of life insurance, retirement and investment solutions in the U.S. With more than 10 million customers, Transamerica targets America’s “middle market,” and its wholly owned insurance agency World Financial Group – which boasts 86,000 independent insurance agents – helps facilitate the insurance part of Transamerica’s business plan.

Aegon also does business in the United Kingdom, as Aegon U.K. is a leading investment platform with 3.7 million customers and is trying to become the U.K.’s leading digital savings and retirement platform. Aegon Asset Management is the company’s global asset management wing. And Transamerica Life Bermuda is the name for Aegon’s life insurance business in Asia. The company has customers all over the globe, with major hubs in Spain, Portugal, France, Brazil and China.

Aegon’s sales peaked in 2019, when the company raked in a record $68.7 billion as the pre-Covid market hit a crescendo. Covid hurt ($42 billion in 2020), and the 2022 bear market hurt even worse (Aegon actually lost $4 billion that year), but the company has since rebounded, with 2023 revenues coming in at $32 billion. While revenues mostly held steady in 2024, the company became profitable again, reporting $797 million in net profits in the second half of 2024 alone, with free cash flow of $414 million. This year, the company expects its operating capital generation (the amount of capital it generates from its ongoing business operations) to improve 46% and its cost of equity to shrink. Meanwhile, Aegon is returning its extra cash to shareholders in droves, announcing a $1.25 billion share repurchase program over the next three years, and upping its dividend payout by 19% last year, resulting in a very generous current dividend yield of 5.5%.

AEG shares trade at 8.3x forward earnings estimates, 0.6x sales and have an enterprise value/revenue ratio of just 0.60 – cheap on all fronts, and with the growth picture improving. AEG is far from sexy, but it has a history of churning out steady returns.

AEG shares were up another 1.5% this week to reach new a new 52-week high! There was no news, but European stocks continue to outperform. The stock now has a mere 11% upside to our 8.00 price target. BUY

Bank of America (BAC) is perhaps the most resilient large U.S. bank. It bounced back from the Great Recession of 2007-08, when BAC shares lost 93% of their value. The stock has rebounded after losing half its value from the 2022 bear market and subsequent implosion of Silicon Valley and Signature banks in March 2023. Now, the bank has never been more profitable or generated more revenue. And at 12x forward earnings estimates, it’s cheap.

Warren Buffett has long seen value in BofA; it’s still the third-largest position in the Berkshire Hathaway portfolio, despite some recent trimming. So, we’re not breaking any new ground here. But sometimes the obvious choice is the right one. The combination of growth, value (BAC also trades at just 1.2x book, cheaper than all but Citigroup among the big banks), and history of resilience makes for an enticing formula.

Like U.S. stocks as a whole, BAC shares have been a bit stuck in the mud of late, but did gain 1% since we last wrote. There hasn’t been a ton of needle-moving, company-specific news since the April earnings report. The stock has shaken off the Moody’s downgrade on long-term deposits of U.S. banks from Aa1 to Aa2. Now, it awaits a catalyst, and investors appear to be looking for more clarity on tariffs before they dive back in to bank stocks head-first. BUY

BYD Company Limited (BYDDY) has long been one of China’s top automakers. What really sent its sales into hyperdrive, however, was when it made the switch to all battery electric and hybrid plug-in vehicles in 2022. Revenues instantly tripled, going from $22.7 billion in 2020 (a record, despite the pandemic) to $63 billion in 2022. In 2023, sales improved another 35%, to $85 billion. In 2024, revenues ballooned to $107 billion, or 25% growth, with another 24% growth expected in 2025. The EV maker has emerged as a legitimate rival to Tesla.

But there’s even greater upside. Right now, BYD does roughly 90% of its business in China, accounting for one-third of the country’s total sales of EVs and hybrids this year. The company is trying to change that, recently opening its full-assembly plant outside of China, with a new plant in Thailand starting deliveries. A plant in Uzbekistan puts together partially assembled vehicles. A plant in Brazil is expected to open early next year. And BYD has plans to open more new plants in Cambodia, Hungary, Indonesia, Pakistan and Turkey. Mexico and Vietnam are possible targets as well. Despite no plans to do business in America just yet, BYD is on the verge of becoming a global brand.

And while BYDDY stock has fared well, it hasn’t grown as fast as the company. At 20.4x earnings estimates, BYDDY currently trades at less than a quarter of its five-year average forward P/E ratio (89.6). And its price-to-sales ratio (1.3) is about half the normal five-year ratio. As BYD continues to expand globally, look for its valuation to catch up with its industry-leading performance.

BYD shares bounced back after a rare down week, up 2%. The brief backlash came after BYD announced up to 34% price cuts on 22 of its electric and plug-in models in China until the end of June after April sales rose “only” 21% – the company’s slowest monthly year-over-year growth since the pandemic. But the good news for BYD far outweighs the bad, as the company topped Tesla’s EV sales in Europe for the first time ever in April, for instance. Sales in Europe improved 169% year over year, with 7,231 battery electric vehicles registered; Tesla’s European sales slipped 49% in April. When you factor in BYD’s hybrid sales, its April haul in Europe was a whopping 359% higher than it was last April.

Fortunately, we advised selling half your BYDDY shares a couple weeks ago – after it had reached our 115 price target but before it pulled back sharply on the price-cut news. We booked a 77% profit on half the position in just six months. We are letting the remaining half run, as I think the stock’s rally is FAR from over. HOLD HALF

The Cheesecake Factory Inc. (CAKE) is ubiquitous. With 345 North American locations, chances are you’ve eaten at one, indulged in their specialty high-calorie but oh-so-tasty cheesecakes and browsed through menus long enough to be a James Joyce novel. But despite being seemingly everywhere already and nearly a half-century old, the company is still growing.

Sales have improved every year since Covid (2020), reaching a record $3.44 billion in 2023. In 2024, revenues expanded to $3.58 billion. But the earnings growth is the real selling point. EPS more than doubled in 2023 (to $2.10 from 87 cents in 2022) and swelled to $3.28 in 2024, a 56% improvement.

It’s still expanding too, opening 26 new restaurants in 2024, with plans to open another 25 this year. Those aren’t just Cheesecake Factories – the company also owns North Italia, a handmade pizza and pasta chain; Flower Child, a health food chain that caters to those with special diets (vegetarians, vegans, gluten-free, etc.); and Blanco, a Mexican chain owned by Fox Restaurant Concepts, which The Cheesecake Factory Corp. acquired in 2019.

CAKE shares trade at 15.5x 2025 EPS estimates and at 0.75x sales. The bottom-line valuation is still slightly below the five-year average forward P/E ratio of 15.6; the price-to-sales ratio is in line with the five-year average.

With shares trading at 10% below their 2017 and 2021 highs, there’s plenty of room to run.

CAKE shares were up 3.5% for a second straight week. There was no news. Q1 earnings from last month continue to act as a catalyst for the share price.

Sales of $927 million were in line with estimates and marked a 4% year-over-year improvement, while adjusted EPS of 93 cents topped the consensus estimate of 91 cents and were 27% higher than the 73 cents it earned a year ago. Comparable-store sales inched up 1% while the restaurant’s cash and cash equivalents ballooned to $135 million compared to $84 million at the end of 2024. Debt, however, soared from $452 million to $627 million.

During the quarter, the company opened eight new restaurants: Three North Italia locations, three Flower Childs and two FRC restaurants. Cheesecake Factory plans on opening 25 new restaurants in total in 2025. All told, a solid quarter.

The stock is up 15% since the report. It still has 13% upside to our 65 price target. BUY

Dick’s Sporting Goods (DKS) has been growing steadily for years.

From 2016 to 2023, the sporting goods chain’s revenues have improved 64%, from just under $8 billion to just under $13 billion. In 2024, topped $13 billion for the first time. It’s on track for close to $14 billion this year.

Dick’s, in fact, has grown sales in each of the last seven years – including in 2020 and 2021, when most other retailers saw sales nosedive due to Covid restrictions. But Dick’s all-weather ability to keep growing no matter what’s happening in the world or the economy speaks to its versatility. Since Covid ended, however, Dick’s sales have entered another stratosphere. As youth sports returned in 2021, Dick’s revenues jumped from $9.58 billion to $12.29 billion. They’ve been rising steadily each year since and are expected to do so again this year.

But Dick’s isn’t purely a growth stock—it’s also undervalued. DKS shares currently trade at 12.4x forward earnings estimates and at 1.1x sales.

DKS shares have been frustratingly stagnant despite the company reporting another solid quarter last Wednesday. Shares are up less than 1% since, and remain near their 2025 lows.

But the quarter was mostly good. Sure, adjusted EPS of $3.37 merely met estimates, but the company beat top-line targets as revenue increased 5.2% year over year, to $3.17 billion. Also, same-store sales improved 4.5%. EBITDA came in well ahead of estimates ($483 million vs. $442 million expected), while the company confirmed its full-year revenue guidance of $13.75 billion at the midpoint. Cash flow isn’t a problem, as evidenced by Dick’s pending purchase of Foot Locker (FL) for $2.4 billion.

So, there was enough for investors to like, even if the quarter didn’t knock people’s socks off. The full-year sales guidance staying the same might be the most reassuring item from the report, as tariffs could threaten Dick’s business more than most, as much of its sports apparel is made in places like China, Indonesia, Japan and Thailand. By reiterating its guidance, the company seems to be signaling that it’s no longer worried tariffs will put a dent in business, at least this year.

I expect the stock to play catch-up soon enough, perhaps if the market gets going from its current range. For now, it has 39% upside to our 250 price target. BUY

Energy Transfer LP (ET) is one of the largest and most diversified midstream energy companies in North America, with approximately 130,000 miles of pipeline transporting oil and natural gas across 44 states. The company transports, stores and terminals natural gas, crude oil, natural gas liquids, refined products and liquid natural gas. Formed in 1996, Energy Transfer came public as a limited partnership in 2004 and has grown from a Texas-based natural gas supplier with 200 miles of pipeline to a national brand that spans nearly every state in the U.S. Today, Energy Transfer transports roughly 30% of all U.S. natural gas and 40% of all U.S.-produced crude oil.

And its reach is expanding, having inked several recent megadeals, including a joint venture with Sunoco (SUN). As the firm’s reach expands, so are its earnings and revenues. This year, EPS is expected to surge 15%, while revenues are on track for 8% growth. After a couple down years, the company has clearly recaptured momentum, with revenues expected to match their 2022 highs ($89 billion) this year and EPS ($1.47) hurtling toward a four-year high.

The stock has a history of outperformance, having beaten the market by almost 4-to-1 over the last one-, three- and five-year periods. But it’s off to a very slow start this year, and is trading at a mere 11.3x EPS estimates and 0.75x sales.

Meanwhile, as a master limited partnership (MLP), ET is a very generous dividend payer, with a current yield of 7.3%. The dividend is constantly growing – the company raised the payout by 3.2% in the fourth quarter and intends to raise it by another 3% to 5% this year. That kind of steady, high-yield income makes ET even more appealing in uncertain times like this one.

ET shares were off 2% this week on no company-specific news. Oil prices remaining stubbornly stuck in the low $60s surely isn’t helping. The stock, however, has rallied nicely since the early-May earnings report. EPS of 36 cents beat estimates by 37% and last year’s 32-cent total by 12%. Revenues were down, however, with the $21 billion total falling short of last year’s $21.63 billion mark and even further short of the $23.4 billion estimate. EBITDA improved by 5.7% year over year. The stock is up more than 11% since the report.

ET shares have 35% upside to our 24 price target. The 7.4% dividend yield has essentially made up for the modest loss thus far. BUY

Buy Low Opportunities Portfolio

Buy Low Opportunities Portfolio stocks include a wide range of value opportunities. These stocks carry higher risk than our Growth & Income stocks yet also offer more potential upside. This group may include stocks across the quality and market cap spectrum, including those with relatively high levels of debt and a less clear earnings outlook. The stocks may not pay a dividend. In all cases, the shares will trade at meaningful discounts to our estimate of fair value.

ADT Inc. (ADT) is literally a household name.

It’s a 150-year-old home security company whose octagon-shaped blue signs with white lettering that say “Secured by ADT” are ever-present in neighborhoods across the country. ADT provides security to millions of American homes and businesses, with products ranging from security cameras, alarms and smoke & CO detectors, to door/window/glass break sensors and more, all of which can alert one of ADT’s industry-best six 24/7 monitoring centers if any one of those security systems is breached.

Business has been fairly stable, with annual revenues hovering in the $5 billion range for four of the last five years (2021 was an exception, with a dip down to $4.2 billion during Covid) and is on track to do it again both this year and next. But where the century-and-a-half-old company has really improved of late is profitability. The last three years marked the first time the company has been in the black in consecutive years, with earnings per share going from 15 cents in 2022 to 51 cents in 2023 to 69 cents a share in 2024. EPS is expected to improve to 81 cents in 2025.

All of that EPS growth makes the share price look quite cheap. ADT shares currently trade at just 10.5x earnings estimates and at just 1.63x sales. A solid dividend (2.6%) adds to the appeal of this mid-cap stock.

After getting knocked back on the heels of touching new 52-week highs above 8.5 last week, ADT shares immediately recovered all those losses and then some this week, advancing more than 4% to reach 8.6, notching a fresh peak. There was no news. The stock is up more than 24% year to date, with much of the strength coming after the Q1 earnings report in late April. Revenue improved by 7% to $1.27 billion; adjusted EPS came in at 21 cents; GAAP operating cash flows shot up 28%; and the company reported record customer retention rates, with recurring monthly revenue up 2% to $360 million.

We have a nice gain on ADT thus far, and the stock still has 16% upside to our 10 price target. BUY

Carnival Corp. (CCL) is one of the two largest cruise companies in the world, along with Royal Caribbean (RCL), as the two combine to own 63% of the market. The difference between them? While RCL shares reached new all-time highs earlier this year (though they’re down more than 27% since), CCL shares have never come close to getting back near pre-Covid levels, when the stock peaked in the low 70s in 2018. CCL currently trades at 17.75 a share and hasn’t gotten any higher than 28 (this January). So the stock trades at a quarter of its all-time highs at a time when sales are higher than ever and profits are back in the black after four straight years of losses. Revenues were up 15.9% in 2024 to $25 billion and are estimated to top $26 billion (+4.25%) this year, with EPS expanding by 30% to $1.84.

After grinding to a halt for two years during Covid, the global travel industry is alive and well as people want to get out and see the world again, making up for lost time after being cooped up for so long. You see it among airlines, which reported record travel numbers last year. But that was the first year airline passenger numbers had topped pre-Covid totals; cruises reached a record in 2023, and last year were 30% higher than their 2019 totals.

Trading at a mere 12.9x EPS estimates 1.3x sales, CCL is a cheap way to play the post-Covid travel boom – at a time when cruises are thriving like never before.

CCL shares have heated up again and are trading at their highest point since February. There’s been no major news. Earnings are due out later this month.

As long as the U.S. economy remains in reasonable shape, Carnival should continue to report record sales, and its share price should play catch-up and get back to pre-Covid levels. Shares have 17% upside to our 28 price target, which is already seeming too modest from a fundamental viewpoint. We have a 30% gain on this stock in just over a month. BUY

The Cigna Group (CI) is the fifth-largest healthcare company in the U.S., with $247 billion in revenue over the last 12 months. It’s a health benefits and medical care provider with a market cap of $83 billion, 170 million customers in over 30 countries, that pays a dividend (2% yield) and grew sales by 27% and adjusted earnings by 9% in 2024 and is expecting another 10% growth this year. And yet, the stock hasn’t budged much in two years and trades at a mere 10.6x earnings estimates and 0.34x sales.

Why the underperformance? Earnings have been inconsistent, with EPS declining 18.8% in 2023 and by 31.4% in 2021. But that appears to be changing, with double-digit growth last year and expected again in 2025, led by its Evernorth Health Services branch, which reported 33% revenue growth in the latest quarter. And healthcare stocks as a group were the second-worst performer of the 11 major S&P 500 sectors in 2024, up a mere 0.87%. As Baby Boomers reach their golden years, healthcare is more in demand than ever, so the sector won’t stay down long. And CI has a habit of outperforming when times are good.

CI shares were down 1.5% this week as healthcare stocks are still wobbling in the wake of President Trump coming after big pharma recently, threatening tariffs on companies’ overseas dealings and slashing drug prices. Those headlines have mostly died down, but healthcare stocks have yet to see a real recovery rally. The stock has 35% upside to our 420 price target. BUY

The next Cabot Value Investor issue will be published on July 10, 2025.

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