May 29, 2025

You Can Still Earn Big Profits in a Flat Market

Wall Street analysts expect stocks to be flat for the rest of the year. That’s according to a new Reuters poll, which surveyed 51 strategists, analysts, brokers and portfolio managers. Among them, the average year-end target for the S&P 500 was 5,900 – roughly in line with the current price, and essentially unmoved since the start of the year.

That’s not exactly exciting news, even if 5,900 would have felt like a win in early April, when the benchmark index dipped below 5,000 after President Trump’s now-infamous “Liberation Day” reciprocal tariff announcement. The rally since then has been impressive, but analysts aren’t confident we’ll get much more movement through the final seven months of the year.

Of course, down-to-flat years are a regular occurrence for the market, and are nothing to fear. Indeed, the S&P has been either down or flat eight times in the 21^st century – exactly one out of every three years. Lo and behold, after two straight years of 20%-plus gains in the index, it’s been three years since the S&P had a down year, during the 2022 bear market. So a flat year, like we had in 2011 and essentially did in 2015 (the S&P was off a mere 0.7% that year), would be far preferable to what we experienced in 2022 (which was a mess) or even in 2018 (-6.2%).

More importantly, though, a flat year for the market does not have to mean a flat year for your portfolio. There’s always a bull market somewhere. European stocks continue their steady outperformance, up nearly 8% year to date. Chinese stocks are faring even better, with the Hang Seng Index up 16% this year and the Golden Dragon China ETF (PGJ) – a fund that includes only Chinese stocks that trade on U.S. exchanges – up nearly 7%. Value stocks are faring slightly better than the average U.S. stock, up 1.4% YTD vs. a 0.7% return in the S&P. And sectors like industrials (+8.8% YTD), utilities (+7.9%) and financials (+5.4%) have posted solid returns; in fact, only four of the 11 major stock market sectors are actually down for the year.

So while a flat market for the rest of the year doesn’t sound like much fun (and of course, that rather pessimistic forecast could always be wrong – Wall Street often gets things wrong), you can still turn a hefty profit this year. We’re doing just that in Cabot Value Investor, with our average holding up more than 13% year to date. I’ll have a new addition to the portfolio in next week’s issue that I believe will bolster our returns even further. Stay tuned.

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

None

Last Week’s Portfolio Changes

Sell Half of BYD (BYDDY), Hold the Rest

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 ($11.2 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 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 5.7%.

AEG shares trade at 8.1x 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 stuck in cement this week, not budging by more than a penny. There was no news. We have a solid gain on this boring Dutch life insurer/investment management company thus far, as it has been partially propped up by strength in the European market. Earlier this month, the company posted some solid first-quarter results: Operating capital generation (OCG) before holding, funding and operating expenses increased 4% to $303 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.

The stock 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.

BAC shares were up more than 1% this week, essentially gaining back the little that was lost on the Moody’s U.S. credit downgrade from the week before. That downgrade has had little impact on bank stocks (along with Bank of America, JPMorgan, Wells Fargo and others had their long-term deposit ratings bumped down from Aa1 to Aa2) or the U.S. market as a whole, which roughly aligns with past credit downgrades. So, no harm, no foul – at least as long as it doesn’t portend bad things for the U.S. economy, as some have forecast.

For now, Bank of America is in fine shape, coming off a solid first quarter. The stock is up 28% in the last six weeks and has recovered all of its late-March/early-April losses. Another 28% bump from here would get it to our 57 price target. Two weeks ago we restored a Buy rating on the stock after it rallied 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.

I hope you took my advice and booked profits (77% in six months!) on half your BYDDY shares last week after the stock topped our 115 price target (and reached new all-time highs!). Because the stock has done a rare faceplant since Memorial Day, falling more than 14% in the last two days. The reason behind the (over-)selling it two-fold: 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. The second reason behind the sharp pullback is that China’s economy may be on the brink of deflation, as economists have lowered their estimates on Chinese consumer price growth to a mere 0.3% this year. Obviously the two headwinds the company is facing are interlinked, as BYD’s aggressive – albeit temporary – price cuts are partly contributing to deflation fears. But I think the selling is overdone considering how well the carmaker’s transformation into a global brand is going—the company topped Tesla’s EV sales in Europe for the first time ever last month, for instance. Sales in Europe improved 169% year over year, with 7,231 battery electric vehicles registered; Tesla’s European sales slipped 49% last month. When you factor in BYD’s hybrid sales, its April haul in Europe was a whopping 359% higher than it was last April.

So while BYD may be dealing with a temporary slump in consumer spending at home – which coincided with peak angst over U.S.-China tariffs, I should note – its overseas sales are accelerating. The stock will be back. We will hold on to our remaining half stake for the foreseeable future, unless the stock or the story totally crater. I doubt that will happen. 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% this week on no news. The stock is now up 16% year to date. Q1 earnings from earlier this month continue to act as a catalyst for the share price.

Sales of $927.2 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 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 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 11% since the report. It still has 18% 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 12x forward earnings estimates and at 1.1x sales.

Dick’s shares are mostly flat in the last week but got a modest boost on Wednesday after the company reported another round of encouraging earnings results. 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. 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.

If the market cooperates, I expect post-earnings buying in DKS to pick up in the coming days given how beaten up shares have been in the last few months. The stock 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 11.4x 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 flat for a second consecutive week after a strong rally from an 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 7.3% 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 10.5x earnings estimates and at just 1.63x sales. A solid dividend (2.6%) adds to the appeal of this mid-cap stock.

After reaching 52-week highs above 8.5 about 10 days ago, ADT shares pulled in a bit, down 3% this week. There was no news. The stock is still up 20% 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 21% 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 12.7x 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 bounced back nicely this week, up nearly 3%. The stock is off to a very good start for us and yet still trades well below its late-January highs above 28. There’s been no news of late.

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 21% upside to our 28 price target, which is already seeming too modest from a fundamental viewpoint. 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 gave back about 2% this week after a nice rebound the previous week. The only news was that its Evernorth wing is putting a cap on weight-loss drugs sold in the U.S. at $200 a month, saving consumers up to $3,600 annually. It’s a good headline for Cigna, but probably doesn’t do much for the share price. In fact, it hasn’t. And yet, the stock is having a good year even after the recent downturn for healthcare stocks as President Trump came after big pharma, threatening tariffs on companies’ overseas dealings and slashing drug prices. Those headlines have mostly died down, allowing CI to resume its general uptrend; the stock is up more than 13% year to date. It still has 34% 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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