May 22, 2025

Retailers Are “On Sale.” Here Are Three with the Biggest Discounts

Retail stocks are having a rough year.

The S&P SPDR Retail ETF (XRT) is down 3.8% year to date, and consumer discretionary as a whole has been the worst performing of the 11 major S&P sectors. It makes sense. Tariffs threaten to hit U.S. retailers hardest, including the many companies that sell products like toys, child car seats, and sports apparel (such as our own Dick’s Sporting Goods (DKS)), most of which are made in places like China, Indonesia, Japan and Thailand – the places with the highest potential tariff rates. Combine that with escalating fears of a U.S. recession – also brought on by tariffs – and it could be a double whammy for retailers who don’t sell the essential everyday items that consumers buy regardless of the economic environment.

Note that I said “could.”

As of now, tariffs are on hold. In early April, a week after “Liberation Day,” President Trump instituted a 90-day pause on high tariffs with basically every country but China. Earlier this month, the administration inked a tariff deal with the U.K. Then, about 10 days ago, a 90-day tariff cease-fire went into effect. So as of this moment, there are no high tariffs. Deals to avoid tariffs could be worked out with each of the roughly 130 nations they were levied against before they ever do any real damage. If that happens, then it could be a “no harm, no foul” situation, and the U.S. economy will continue on its merry way, with consumers never really reining in their spending.

Indeed, most of the hard data still points to a healthy U.S. economy. Inflation is down to a four-year low. Corporate earnings are on track for a second straight quarter of double-digit growth in Q1. The jobs market is holding up fine. U.S. GDP contracted slightly in Q1, but with major caveats, as companies tried to frontload their imports to avoid impending tariffs, causing the number (-0.3%) to skew negative. And, perhaps most importantly, retail sales have been unharmed, with April sales up 5.2% year over year – the same number as March. They were also 0.1% higher in April than in March.

While retailers have not matched the earnings growth of the average S&P company in the first quarter – consumer discretionaries have reported 8.2% EPS growth, vs. the 13.6% growth rate among S&P companies as a whole – that’s well ahead of the mere 0.6% growth that was expected from retailers before earnings season began, as the sector has posted more earnings season surprises than any other sector aside from communication services.

U.S. retailers are doing just fine. Their share prices are not. And therein lies an opportunity. Consumer discretionaries as a group trade at 20.5x forward earnings estimates, less than the 22.1 forward P/E ratio in the S&P. That’s roughly middle of the pack among S&P sectors in terms of valuation. But for a sector that’s posted the worst performance year to date.

Which retail stocks stand out as being particularly undervalued? Well, we just added one of them in cruise line giant, Carnival Corp. (CCL), which is off to a rousing start for us. Here are three others with intriguing combinations of value and growth:

Bath & Body Works (BBWI)

Forward P/E ratio: 9.3

Price-to-sales: 1.01

Projected 2025 EPS growth: 8.8%

Urban Outfitters (URBN)

Forward P/E ratio: 14.0

Price-to-sales: 1.04

Projected 2025 EPS growth: 9.6%

Hilton Grand Vacations (HGV)

Forward P/E ratio: 11.4

Price-to-sales: 0.82

Projected 2025 EPS growth: 14.6%

I’m not ready to add any of these three undervalued retail stocks to our portfolio just yet. Having added Carnival (CCL) to the portfolio earlier this month, that means three of our nine current holdings are retailers, including The Cheesecake Factory (CAKE) and the aforementioned Dick’s Sporting Goods (DKS). To devote more than one-third of our portfolio to one sector would be a mistake. However, if you have a larger portfolio and are looking to add a retail play while the sector is overly beaten down, any one of the three listed above would be an appealing option.

On the heels of a swift market recovery, value opportunities are getting harder to come by. But plenty of retail bargains remain.

Meanwhile, our Cabot Value Investor portfolio continues to cook, with our holdings up on average this week and posting a 13.5% year-to-date gain. I’ll be looking to add to our haul, likely from a non-retail sector, in a couple weeks.

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

Sell Half of BYD (BYDDY), Hold the Rest

Last Week’s Portfolio Changes

Bank of America (BAC) Moves from Hold to Buy

Upcoming Earnings Reports

Wednesday, May 28 – Dick’s Sporting Goods (DKS)

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 ($11.2 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 5.7%.

AEG shares trade at 8.2x forward earnings estimates, 0.6x 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 shares were up more than 3% this week after the company reported some impressive first-quarter trading results. Operating capital generation (OCG) before holding, funding and operating expenses increased 4% to $302.5 million. International joint ventures reported higher sales. And the company posted net inflows at its U.K. Workflows business. As a result, the company is returning more cash to shareholders, announcing a €200 million ($226 million) stock buyback in the second half of this year.

We have a double-digit gain on AEG after just two and a half months. The stock still has 13% 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 1.21x book, cheaper than all but Citigroup among the big banks), and history of resilience makes for an enticing formula.

Having your credit rating downgraded is never good for business. Fortunately, Moody’s decision to reduce Bank of America’s long-term deposit rating from Aa1 to Aa2 – along with fellow big U.S. banks JPMorgan and Wells Fargo – in conjunction with the downgrade of the U.S. government’s sovereign credit ratings, hasn’t hurt BAC’s stock price much. Shares are down only slightly since we last wrote. Rising national debt and ongoing political turmoil were the reasons given for Moody’s downgrades. Specifically, the credit ratings agency said, “While we continue to believe there is a moderate probability of U.S. Government support for the depositors, senior unsecured creditors, and counterparties of the systemically important subsidiaries of BAC, BK, JPM and WFC … the downgrade of the U.S. Government’s rating indicates that it has less ability to support these highly-rated obligations.”

How big a deal is the downgrade? Not much, according to the market. Just as the Moody’s downgrade for the U.S. government hasn’t sent stocks as a whole spiraling, it hasn’t put much of a dent in shares of the banks that were cited, including BAC. It’s something to monitor going forward – at some point, the lowered rating could matter if the market sours. More likely, however, is that this serves as a warning, in case the debt and political turmoil spike any further and trigger a banking crisis/recession.

For now, Bank of America is in fine shape, coming off a solid first quarter. The stock is up 29% in the last six weeks and has recovered all of its late-March/early-April losses. Another 29% bump from here would get it to our 57 price target. Last week we restored a Buy rating on the stock after it bumped above its 200-day moving average. We’ll stick with that rating. 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 23.7x earnings estimates, BYDDY currently trades at little more than a quarter of its five-year average forward P/E ratio (89.6). And its price-to-sales (1.46) 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 has reached our 115 price target and is trading at new all-time highs! The latest bump in the share price came from Citi’s price target hike after BYD’s export market share accelerated to 38% through the first four months of the year – up from 23% through the first four months of 2024. That’s real progress toward the company’s stated goal of selling at least half of its vehicles outside of China by 2030; it currently does roughly 90% of its business in China.

BYD is acting like one of the market’s great growth stocks, and we have a 75% gain in six months to prove it. But while the valuation is getting a bit frothy by the standards of a traditional value stock, it remains “cheap” compared to its own history, trading at little more than a quarter of its five-year average on a forward price-to-earnings basis. So, as we did with United Airlines (UAL) when it quickly eclipsed our price target but maintained bargain-level valuations, let’s sell half our BYDDY shares to book that quick 75% profit and hold the remaining half. If and when it encounters real turbulence, we’ll book the remaining half. But that may not happen for some time. SELL HALF, HOLD THE REST

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 15% below their 2017 and 2021 highs, there’s plenty of room to run.

CAKE shares gave back very little after a nice post-earnings runup, down just over 1% this week. There was no company-specific news. The Q1 report from earlier this month was good. 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 is up nearly 7% since the report. It still has 22% 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 12.7x forward earnings estimates and at 1.1x sales.

DKS shares had a rough week, plummeting 15% to give back all of the 11% bump (and then some) they got from the China-U.S. tariff pause news from the previous week. The reasons were two-fold: first, Dick’s is acquiring Foot Locker (FL) for $2.4 billion, which is good news, but shares of the acquiring company almost always take a temporary hit after such a deal is announced. Second, the company released preliminary Q1 earnings results (full results are due out next Wednesday, May 28), which were … good. Comparable-store sales growth came in at 4.5%, more than double most estimates. Also, adjusted EPS is $3.37, higher than the $3.30 estimate. Perhaps there was something under the hood of the preliminary results that Wall Street didn’t like. But a 14% one-day dropoff seems like a major oversell. So I expect shares to bounce back, either before or after next week’s earnings.

Sometimes companies get punished for no good reason in the short term. Typically, Wall Street realizes its mistake and corrects it. With a likely recovery coming, this looks like a prime buying opportunity in a stock that now has 40% 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 paused this week after a strong rally from 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 13% since the report, pushing to its highest point since March.

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 7.2% 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 10.5x earnings estimates and at just 1.63x sales. A solid dividend (2.6%) adds to the appeal of this mid-cap stock.

ADT shares were up another 1.5% this week and have now risen more than 23% year to date. The main catalyst has been the first-quarter earnings report from last month. 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 17% 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 1.27x sales, CCL is a cheap way to play the post-Covid travel boom – at a time when cruises are thriving like never before.

CCL gave back a little – about 2.5% – but has mostly held onto its 27% gain from the previous two weeks, which happened to be the first two weeks after we added this stock to the portfolio. There was no company-specific news. Earlier this month, the company announced a $1 billion debt offering intended to refinance high-interest notes as the cruise company fine-tunes its capital structure.

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 24% upside to our 28 price target, which is already seeming too modest. 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.

CI shares bounced back as predicted this week, up 5.5% on no news. President Trump’s threats to place tariffs on U.S. drugmakers’ overseas dealings to cut out the “middlemen” to help “facilitate the direct sale of drugs at the most favored nation price, directly to the American citizen” took a toll on healthcare stocks earlier this month, CI included. Now that his rhetoric has cooled and the headlines have faded, investors are again focusing on Cigna’s recent earnings, which were encouraging. 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.

CI had plenty of momentum before big pharma companies started taking heat, and shares are still up more than 16% year to date. They now have 31% upside to our 420 price target. BUY

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

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