Cabot Value Investor Issue: April 3, 2025

Giving Our Portfolio a Jolt of “Energy”

In a miserable first quarter for the market, energy stocks were a rare bright spot. In fact, they’ve been the best-performing sector by a wide margin, up more than 9% through the first three months of 2025. No other sector managed even half those gains.

It wasn’t due to soaring oil prices. Crude oil currently costs $70 a barrel – the same as it was to start the year, and down from $85 a barrel this time a year ago. The reasons are two-fold: 1) that energy was one of the worst-performing sectors in 2024 and had become undervalued, and 2) the new administration is more fossil-fuel-friendly, at least in theory, and investors are snatching up shares of traditional energy companies accordingly based on that premise. Better yet, energy is still the most undervalued sector even after getting off to such a fast start this year, with an average forward price-to-earnings ratio of 11.4. No other sector has a forward P/E of less than 14. It’s also the cheapest sector on a price-to-sales, price-to-book and price-to-free-cash-flow basis.

And while energy stocks aren’t the fastest-growing sector, they’re also not a laggard. Of the 11 primary S&P 500 sectors, energy ranks sixth in terms of expected earnings per share growth over the next five years, at 12.1%. So, when you combine average growth, the cheapest sector by every measurement, and the most share price momentum of any group, you have the recipe for extended outperformance – especially if oil prices begin to escalate in the summer, as they often do.

As we’ve written ad nauseum in recent weeks, tariffs are like an anvil weighing down U.S. stocks, and yesterday’s “Liberation Day” did little to quell those fears. So it makes sense to invest in one of the few sectors in which U.S. stocks are actually benefiting from the new regime – and whose business will not be overly impacted by tariffs. Specifically, we looked for a company that does much of its business in the U.S. and doesn’t rely on much shipping from Canada, Mexico or other places that may be subject to Trump’s 25% (or worse) tax.

I believe I’ve found a company that fits that bill – an undervalued energy stock that does most of its business in the U.S.

New Buy

Energy Transfer LP (ET)

Energy Transfer 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. Several recent megadeals have expanded the company’s reach: In November 2023, it merged with Crestwood Energy Partners in a $7.1 billion deal that extended its reach in the fertile Williston, Delaware region and the Powder River basins in North Dakota and Montana. Last July, Energy Transfer formed a joint venture with Sunoco (SUN) that combines the companies’ crude oil and produced water gathering assets in the Permian Basin. And this February, the company entered a long-term agreement with Cloudburst Data Centers to provide natural gas to power Cloudburst’s AI-focused data center development.

In the latest quarter, Energy Transfer’s crude oil transportation volumes improved by 15%; NGL volumes grew 5%; and interstate natural gas volumes increased 2%. 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.

As for the stock, it has gotten off to a slow start this year, down 4.5% at a time when most energy stocks have outperformed. An earnings miss in early February was partly to blame, as EPS of 29 cents came in well shy of the 37-cent estimate. But ET has a long history of extreme outperformance, with shares outpacing the market by at least a 4-to-1 over the last one-year, three-year and five-year time periods. Trading at 12.7x this year’s earnings estimates and just 0.77x sales, and with shares about 16% below their late-January highs above 21, I view this year’s slow start as a feature, not a bug. ET has been a reliable outperformer and is now available at a discount – with plenty of growth expected this year.

Meanwhile, as a master limited partnership (MLP), ET is a very generous dividend payer, with a current yield of 6.9%. 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.

I think ET should be able to get back to its January highs above 21 fairly quickly; I’m going to set a price target of 24, which is 28% higher than the current price. Given the stock’s history of significant outperformance and its slow start to the year, that seems like a reasonable target. Any movement in oil prices could inspire ET to reach our price target fairly quickly. And the high dividend yield means we get paid handsomely while we wait. BUY

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

Buy Energy Transfer LP (ET) with a 24.00 price target

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 ($10.7 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 5.3%.

AEG shares trade at 8.3x forward earnings estimates, 0.63x 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 down 2% this week on no news, other than a re-shuffling of its board of directors. The stock is still up more than 13% year to date, but keeps running into resistance in the high 6s. There’s no obvious upcoming catalyst that could finally push it to new highs, other than ongoing outflows from U.S. stocks into European stocks, which continue to outperform.

AEG has 20% upside to our 8.00 price target. The 5.3% dividend yield adds to its appeal. 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 11.7x forward earnings estimates, it’s cheap, even after doubling the market in the last year.

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 share price momentum makes for an enticing formula.

BAC shares were off 3% this week in sympathy with the market. There was no major news, though there will be soon: The bank reports first-quarter earnings results on April 15. After three Wall Street analysts raised their price target on the stock in the first month of the year, three analysts have lowered their target in the last few weeks. It should be noted, however, that all of those targets remain well north of current levels.

Trading at 11x forward earnings estimates, BAC remains a bargain. As long as the U.S. economy doesn’t collapse, the stock should be much higher in the months to come. It has 36% upside to our 57 price target. 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 (1.34) 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 continued to pull back on the heels of their huge run to start the year, falling 5% for a second consecutive week. News for the Chinese EV maker remains good, though perhaps not as awe-inspiring as the first couple months of the year. The company signed a car parts distribution deal in Italy and announced plans to double overseas sales, to more than 800,000 units, in 2025, with Latin America, Southeast Asia and the United Kingdom mentioned as top priorities. Factories are being built in Brazil, Thailand, Hungary and Turkey. Notably, BYD has almost no exposure to the U.S. Ordinarily, that would be a red mark against it, but in this era of tariffs, that means it has very little exposure to Trump’s trade-taxing wrath. Meanwhile, Tesla just had its worst sales quarter since 2022. With the world’s premier EV maker weakening, BYD’s ambitious aspirations to fill the void and become a global brand are becoming more realistic by the day.

Up more than 42% year to date, even after the recent drawdown, BYDDY has 18% upside to our 115 price target. Buy the dip if you missed out on the previous rally. 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 13.7x 2025 EPS estimates and at 0.69x sales. The bottom-line valuation is well 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 were up 2% this week on no news. Last month the popular restaurant chain announced 22 additions to its famously already-extensive menu. Among the additions, there’s a new smashburger, some vegetarian options like Asian cucumbers and baby carrots, and new alcoholic beverages including a Japanese Whisky Sour and a Margarita Verde. It’s all part of the restaurant’s ongoing effort to have “something for everyone,” which is why it does such good business. The stock is up 6% since the additions were announced, at a time when the market has been headed in the opposite direction.

CAKE has 27% 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 just under 14x forward earnings estimates and at 1.27x 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.

DKS shares were up 1% this week on no news. The stock is now up 8% in the last two weeks to bounce back from a rough first half of March.

The company is coming off another strong earnings report in mid-March. In the fourth quarter, Dick’s beat estimates on both the top and bottom line, with EPS of $3.62 topping the $3.48 estimate and $3.89 billion in sales ahead of the $3.76 billion expected. Also, same-store sales improved 6.4% in the fourth quarter (its best performance in two and a half years), 5.2% for full-year 2024, and earnings were up 15% last year. Guidance came in a bit cautious, which may partly explain the initial selling that occurred following the report. But the abrupt bounce-back seems to be a tacit admission that the selling was overdone.

DKS shares have 20% upside to our 250 price target. The 2.3% dividend yield adds to the appeal. 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 10x earnings estimates and at just 1.61x sales. A solid dividend (2.7%) adds to the appeal of this mid-cap stock.

ADT shares didn’t move an inch on no news. The stock is taking a well-earned breather after running up more than 19% year to date to reach new 52-week highs above 8.2. The stock still has 21% upside to our 10.00 price target. 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 $89 billion, 170 million customers in over 30 countries, that pays a dividend (1.8% 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 11.2x earnings estimates and 0.38x sales. It’s the cheapest CI shares have been in more than a year.

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’s resurgence is virtually complete, with the stock rallying another 3.5% this week despite the down market. It’s now up nearly 20% year to date and is trading at its highest point since early December. There’s been no obvious catalyst. Rather, Cigna and other mega-cap health insurers became oversold in December and January after a series of unflattering news – Congressional accusations of price-gouging and payments to so-called “middlemen,” plus the tragic shooting of United Healthcare’s CEO. But none of those bad headlines changed the fact that healthcare companies are growing, and the aging U.S. population, as Baby Boomers enter their retirement years, means demand for healthcare won’t slow anytime soon.

Finally back near our entry price, CI shares have 27% upside to our 420 price target. BUY

Peloton (PTON) was all the rage during Covid, as people stuck at home snatched up the stationary bike with a built-in, interactive touch screen like hotcakes, and revenues quadrupled in two years. Then, Covid ended, people stopped buying Pelotons, and PTON shares – up 700% in the last nine months of 2020 – fell to nearly zero, at a scant $3 per share. The selling was overdone, considering Pelton’s sales only fell off by about a third. Now, the bleeding has just about stopped, and the company is expecting to grow again in the coming year. Aggressive cost-cutting – the company is lowering costs by $200 million this (2025) fiscal year alone – has narrowed profit losses and allowed Peloton to generate free cash flow again. It’s using that cash to attract and retain customers, investing in software updates such as personalized workout plans and private “teams” for every subscriber. It’s offering new apps such as Strength+ and fitness “games.” And it is exploring new strategic partnerships to broaden its reach and perhaps start attracting new customers again.

It was another bad week for PTON, with shares falling 10% after showing progress the previous two weeks. There was no news, so the selling was likely market-driven – small caps in particular have struggled of late. Also, the stock remains well north of its March lows. So, let’s hang in there with our Hold rating. Earnings aren’t due out for a month, so PTON may require an improved market to get out of its current rut. I still like the upside once small caps can get well. HOLD

The next Cabot Value Investor issue will be published on May 1, 2025.

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.