Embrace the Market Turnaround
What a difference two months make!
On April 8, the Nasdaq had plummeted to bear market territory after touching all-time highs just six weeks earlier, and the S&P 500 was on the cusp of joining it. Small caps were faring even worse. Volatility had spiked to multi-year highs. And everyone was certain a recession or high inflation – or both – were imminent.
The reason was tariffs. “Liberation Day,” a week earlier, on which President Donald Trump had imposed sky-high tariffs on more than 100 U.S. trading partners from all over the world, had sent stocks plummeting as economists clutched their pearls and warned of imminent collapse.
Fast forward to today, just over two months later, and it’s a totally different picture. Tariffs are on a 90-day pause. Volatility has evaporated. Inflation is at four-year lows. The economy is doing just fine, with unemployment holding steady and U.S. companies posting a second consecutive quarter of double-digit earnings growth in Q1. And stocks are back near their February highs, having completely recovered their late-March/early-April losses.
Granted, the coast isn’t totally clear – not by a long shot. Tariffs are on pause; they aren’t dead, despite a federal judge’s best efforts. Stocks have recovered from their April implosion, but they aren’t soaring, with the S&P up just 2.7% year to date. And consumer and investor skepticism remains. As the 90-day tariff pause deadline looms in the first half of July for all but the United Kingdom (the only country with which the Trump administration has struck a tariff deal thus far), I’d expect that skepticism to translate to increased volatility and uncertainty and potentially trigger another modest pullback in stock prices. All bets are off if the tariff deadlines come and go with no deals and no more “pauses.”
But as investors, we have to go with the evidence in front of us, and right now, it’s quite good. Stocks across the board are acting well, as the S&P Equal Weight Index has moved in tandem with the S&P, and value stocks have kept pace with growth. Meanwhile, the stocks in the Cabot Value Investor portfolio have done a lot more than keep pace, with an average YTD gain of 10.6% so far this year. After last week’s addition of industrial mid-cap KBR, Inc. (KBR), we now have a full 10-stock portfolio for the first time since early this year – a byproduct of a strong market. If our portfolio remains full a month from now, it would likely mean that the tariff deadlines have come and gone without incident.
If there’s a lesson to be learned from the past two months, it’s this: tariffs are like bad weather. If you just throw on your poncho and wait it out, there’s likely to be plenty of sunshine once the clouds part. Remember that if clouds start to form again in the coming month.
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.
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This Week’s Portfolio Changes
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Last Week’s Portfolio Changes
Buy KBR, Inc. (KBR) with a 72.00 price target
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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 ($11.5 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, 0.66x sales and have an enterprise value/revenue ratio of just 0.59 – 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 keeps plugging along, adding another 1.5% this week as European stocks remain in favor. There was no news. The stock is now within striking distance – 10% – of our 8.00 price target. We have a 16% gain on the stock (not including the dividend) in just over three months! 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.
BAC shares were up 1.5% this week as Goldman Sachs raised its price target on the stock from 46 to 52. We have our sights set a bit higher, with a 57 price target, as the U.S. economy remains surprisingly buoyant, and Bank of America shook off last month’s Moody’s downgrade on long-term deposits from Aa1 to Aa2 without much problem. With only 26% necessary to get there, our 57 price target seems more than achievable, as long as tariffs don’t sink the economy. 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 20x 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 were up 4% this week and have recovered about half their losses after announcing temporary 34% price cuts to 22 of its models in China in late May that knocked the stock back a bit. I have zero worries about the implications of BYD’s price cuts in China, since the company is having major success in its efforts to become a global brand, outpacing Tesla sales in Europe in April for the first time ever. We sold half our BYDDY shares last month after they topped our (already-raised) 115 price target, with the intent of letting the remaining half rise. I think the stock will be much higher months – and certainly years – from now as the company becomes more than just a Chinese EV maker. HOLD HALF
The Cheesecake Factory Inc. (CAKE) is ubiquitous. With more than 350 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 16.5x 2025 EPS estimates and at 0.8x sales. With shares trading at 9% below their 2017 and 2021 highs, there’s plenty of room to run.
CAKE was up 1% this week on no news. The latest earnings report continues 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 16% since the report. It still has 12% 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 12.7x forward earnings estimates and at 1.1x sales.
DKS shares are finally showing signs of life, up 3.5% this week on no news. Perhaps it’s a delayed reaction to first-quarter earnings from two weeks ago, which were mostly good. 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.
After refusing to budge for the first week after earnings were released, DKS is starting to accumulate interest again. Perhaps it’s the start of a longer rally as fears of tariffs’ impact on business have been allayed, at least temporarily. The stock has 34% 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 11.2x 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 have been bouncing around in the 17-18 range for about a month now, with one step forward, one step back on seemingly a weekly basis. This week, the pendulum was up, with shares rising 2.5%. A move above 18.16 (about a dime away, as of this writing) would be bullish. Oil prices are starting to rebound, up to $66 a barrel after dipping below $60 in May, so perhaps that can act as a tailwind for any company-specific news. The stock has 33% upside to our 24 price target. The hefty 7.4% dividend yield more than makes up for our modest loss thus far. BUY
KBR, Inc. (KBR) 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.
While sales have surpassed pre-Covid levels, however, shares haven’t consistently followed suit, peaking in late 2024 but currently trading at 27% below its apex. At 13.9x earnings and 0.88x 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).
KBR shares barely budged in their first week in the Cabot Value Investor portfolio. There was no news. Last November, the stock stretched as high as 72. I think it can get back there, giving us 37% upside from here. 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 10.2x earnings estimates and at just 1.6x sales. A solid dividend (2.7%) adds to the appeal of this mid-cap stock.
ADT shares got knocked back about 4% after touching new highs above 8.6 last week. There was no news. The stock is up more than 20% 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 20% 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 13x EPS estimates and 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 were up another 1.5% this week and have been on a tear since we added the stock to the portfolio last month. There was no news. The company does report earnings later this month, however.
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 16% upside to our 28 price target, which is already seeming too modest from a fundamental viewpoint. We have a better than 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 unchanged this week on no news. 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
Growth/Income Portfolio | |||||||
Stock (Symbol) | Date Added | Price Added | 6/11/25 | Capital Gain/Loss | Current Dividend Yield | Price Target | Rating |
Aegon Ltd. (AEG) | 3/6/25 | 6.24 | 7.26 | 16.35% | 5.50% | 8 | Buy |
Bank of America Corp. (BAC) | 2/6/25 | 46.81 | 44.68 | -4.55% | 2.30% | 57 | Buy |
BYD Co. Ltd. (BYDDY) | 11/21/24 | 67.5 | 109.63 | 62.41% | 1.00% | N/A | Hold Half |
Cheesecake Factory (CAKE) | 11/7/24 | 49.68 | 57.36 | 15.50% | 1.80% | 65 | Buy |
Dick’s Sporting Goods (DKS) | 7/5/24 | 200.1 | 186.1 | -7.00% | 2.70% | 250 | Buy |
Energy Transfer LP (ET) | 4/3/25 | 18.86 | 18.14 | -3.71% | 7.40% | 24 | Buy |
KBR, Inc. (KBR) | 6/5/25 | 52.56 | 52.57 | 0.00% | 1.30% | 72 | Buy |
Buy Low Opportunities Portfolio | |||||||
Stock (Symbol) | Date Added | Price Added | 6/11/25 | Capital Gain/Loss | Current Dividend Yield | Price Target | Rating |
ADT Inc. (ADT) | 10/3/24 | 7.11 | 8.28 | 16.46% | 2.70% | 10 | Buy |
Carnival Corp. (CCL) | 5/1/25 | 18.1 | 24.22 | 33.81% | N/A | 28 | Buy |
The Cigna Group (CI) | 12/5/24 | 332.9 | 311.91 | -6.31% | 1.90% | 420 | Buy |
Note for stock table: For stocks rated Sell, the current price is the sell date price.
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