May 15, 2025

Stocks Pass an Important Litmus Test. Are New Highs Forthcoming?

Stocks are back in business!

Yes, a little more than a month after some of the worst investor sentiment readings in years, soaring volatility, and a 19% decline in the S&P 500 – not to mention both the Nasdaq and the Russell 2000 swinging to bear market territory – stocks are suddenly on a roll, recession fears are abating, and, perhaps most importantly, tariff deals have been struck. The 90-day pause on most reciprocal tariffs initiated by President Trump on April 9 – one week after the deeply unpopular “Liberation Day” was announced – triggered one of the biggest one-day rallies in stock market history. Indexes flirted with their early-April lows two weeks later but eventually stabilized, and May has brought a wave of positive tariff news – first, a deal with the United Kingdom, in which key imports like cars were reduced to 10% and steel and aluminum tariffs were eliminated; then, last weekend came a 90-day truce with China. That sent stocks soaring more than 3% on Monday, and they haven’t looked back.

It was enough to push the S&P decisively above its 200-day moving average for the first time in over two months. The last two times that happened in this two-and-a-half-year bull market (the bull market never technically ended in the S&P), stocks continued soaring to new all-time highs (see chart below: the red line is the 200-day moving average).

Does that mean the same thing will happen this time? Certainly not. In fact, the first time the S&P shot past the 200-day line during the current bull market – in January 2023 – the rally fizzled within about two or three weeks, and the index came crashing back below its 200-day line – albeit briefly – in early March. Given that all but the U.K.’s tariffs are paused, not signed to much more palatable deals, this could be a similar false start.

Still, the 200-day line is an important technical hurdle, and one that felt miles away as recently as the beginning of this month. Getting back above it means that a) the bottom is likely in the rearview mirror, and the bull market in the S&P should continue for some time, and b) there’s real momentum in the market for the first time since just after the election last November.

Thanks to the recent rally, growth stocks are starting to play catch-up to value stocks, though value stocks (the VTV is up 0.5% year to date) are still narrowly outperforming growth stocks (-0.5% YTD) in 2025. Meanwhile, our portfolio – which focuses on “growth at value prices” – continues to outperform both measurements by a wide margin, with our stocks up 13.2% YTD, including some big gains this past week as the market took off. Our new position in Carnival Corp. (CCL) is off to a particularly encouraging start. Meanwhile, BYD (BYDDY) continues to amaze.

My advice? Embrace the improved market. Put some of your cash to use, either by adding to current positions or starting new ones. All nine stocks in our Cabot Value Investor portfolio are now rated “Buy,” as we upgrade Bank of America (BAC) from “Hold” in this update. I recommend any of them.

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.

This Week’s Portfolio Changes

Bank of America (BAC) Moves from Hold to Buy

Last Week’s Portfolio Changes

None

Upcoming Earnings Reports

None

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 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 a company generates from its ongoing business operations, excluding one-time events) 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 6.3%.

AEG shares trade at 7.8x forward earnings estimates, 0.6x sales and have an enterprise value/revenue ratio of just 0.62 – 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 on no news. The stock is now trading at new 2025 highs and is a whisker below the 52-week high from last May. It’s up 16.6% year to date, outpacing the 6.5% gain in European stocks. Our timing was good here, and yet shares of this boring Dutch life insurance and financial services firm are still cheap, trading at less than 8x forward earnings. So we’ll maintain our 8.00 price target, giving the stock 17% upside to our 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 1.21x book, cheaper than all but Citigroup among the big banks), and history of resilience makes for an enticing formula.

As recession fears have faded, BAC shares have surged. The stock was up 7.5% this week, with the only company-specific news being that the bank plans to open 150 new branches by 2027, including 40 this year. The real drivers were the positive news on tariffs, namely the China deal, plus the cooler-than-expected inflation report on Tuesday, quelling economists’ calls for a recession this year. The stock is still down slightly from our entry point and a bit more from its 2025 highs above 47, but like the market, BAC is now trading above its 200-day line for the first time since March.

The more strong economic news that comes out, the more likely it is that BAC’s surge will continue. The bank is coming off a solid quarter in its own right: Year over year, earnings improved 11%, while revenue climbed by 5.9%. Net interest income ($14.6 billion) also came in slightly higher than expected, while equities trading revenue improved 17% – no small feat during a down quarter for the market (although investment banking fees slipped 3% year over year).

BAC shares have 28% upside to our 57 price target. The 2.4% dividend yield adds to the appeal. With the stock now back above its 200-day line, let’s restore our Buy rating. MOVE FROM HOLD TO 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 21.5x 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 (1.32) ratio 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 7.5% this week and are nearing their March highs above 108. The only company-specific news is that the Chinese EV maker continues to extend its tentacles globally, out-selling Tesla in Germany and the U.K. in April. The company’s lack of presence in the U.S. has helped it avoid all the China-U.S. tariff angst, though it got a big bump this week by proxy nevertheless. The stock is up 55% year to date but still has immense upside; we upped our price target on it to 115 after it blew past our initial target of 90. I think that 115 target is conservative, especially the stock’s modest valuation compared to its history. BUY

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 15x 2025 EPS estimates and at 0.73x sales. The bottom-line valuation is still 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 20% below their 2017 and 2021 highs, there’s plenty of room to run.

CAKE shares were up 6% this week on no news. The Q1 earnings report from two weeks ago continues to act as a tailwind. Sales of $927.2 million were in line with estimates and marked a 4% year-over-year improvement, while adjusted EPS of 93 cents easily topped the consensus estimate of 91 cents and was 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 $135.4 million compared to $84.2 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 has 21% 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 should top $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 14.7x forward earnings estimates and at 1.3x sales. To be sure, it’s not the cheapest stock in our portfolio. But it is one of the fastest growing – and pays a solid dividend to boot.

Few retailers have been at the mercy of tariff news like Dick’s Sporting Goods, which sells sports apparel that comes from many of the countries with the highest initial tariffs – Indonesia, Thailand, Vietnam and, of course, China. So this week’s news that the U.S. and China are instituting a 90-day pause on their sky-high reciprocal tariffs was a boon for DKS shares, sending the stock higher by 11%. Where it goes from here may depend on earnings results, due out on May 28. But for now, the China tariff relief may serve as a temporary tailwind in the absence of other news.

We are now back in the black on DKS. The stock still has 18% 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 10.9x 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 up 6.5% this week as crude oil prices were up more than 8% after dipping below $60 a barrel. Last week’s solid-if-unspectacular earnings report is also likely propping up shares. 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 13% since the report, pushing to its highest point in six weeks.

After getting off to a very slow start for us, ET is now approaching our entry price. It has 33% upside to our 24 price target. The 7.3% dividend yield more than makes 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 10.1x earnings estimates and at just 1.57x sales. A solid dividend (2.7%) adds to the appeal of this mid-cap stock.

ADT shares inched up another 1.5% this week on no news. The stock is still riding the wave of last month’s earnings results. 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. Also, the company returned $445 million to shareholders in Q1 in the form of buybacks and dividends. In February, ADT’s board approved a $500 million share repurchase plan.

We have a nice gain on ADT thus far, and the stock still has 19% 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 12.3x EPS estimates 1.26x sales, CCL is a cheap way to play the post-Covid travel boom – at a time when cruises are thriving like never before.

You couldn’t have drawn up a much better start for CCL since we added it to the portfolio! It’s already up more than 27% in the two weeks since we recommended it, including a 16% run-up this week as consumer discretionary stocks – and travel titles in particular – got a huge boost from U.S.-China tariff cease-fire as well as the easing of recession fears and high-inflation worries brought on by an encouraging CPI report. Carnival also announced a $1 billion debt offering intended to refinance high-interest notes as the cruise company fine-tunes its capital structure.

The big move in CCL’s share price comes despite a significant price target downgrade from Macquarie, from 31 to 26. We will maintain a price target that’s right in the middle of that range, 28, though CCL shares are already more than halfway to that target after just two weeks in the portfolio. 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 $90 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 10.3x earnings estimates and 0.33x 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.

Healthcare stocks, and namely big pharma companies like Cigna, are one of the few out-of-favor sectors suddenly as President Trump is threatening tariffs on U.S. drugmakers’ overseas dealings and wants to cut out the “middlemen” to help “facilitate the direct sale of drugs at the most favored nation price, directly to the American citizen.” CI was no exception, falling 9% this week. The U.S. pays about 3 times more for prescription drugs than any other nation, and the president has asked U.S. companies to bring their U.S. drug prices more in line with those in Europe. That, of course, could put a dent in big pharma’s bottom line.

As for the here and now, Cigna reported strong quarterly results earlier this month. EPS came in at $6.74 in Q1, up from $6.47 a year ago, and Cigna raised its full-year profit guidance slightly, to $29.60 from $29.50. Lower-than-expected medical costs in its insurance business and strong performance in its pharmacy benefit management wing were the highlights. Cigna’s recent sale of its Medicare business to Health Care Service Corp. was fortuitous, coming at a time when Medicare and Medicaid funding is in question, something that sank rival UnitedHealth’s earnings last quarter. Revenues improved 14.4% year over year.

That’s what’s actually happening with the company. But right now, Wall Street is laser-focused on what could happen if Trump follows through on his drug pricing initiatives. We’ll see, but my feeling is that the selling is overdone, and investors will pile back into CI until there’s more concrete follow-through on drug pricing.

The stock has 38% upside to our 420 price target. BUY

Note for stock table: For stocks rated Sell, the current price is the sell date price.

Copyright © 2025. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.