Cabot Value Investor Issue: March 6, 2025

Adding a “Boring” European Value Stock as U.S. Growth Stocks Flounder

U.S. stocks are in the midst of their sharpest pullback since last summer, and growth stocks are feeling the brunt of the selling.

The iShares Russell 1000 Growth ETF (IWF) is down more than 8% in just the last two weeks and 5.5% year to date. The market as a whole is now down for the year, too, thanks to this tariff-happy disaster of a week. The S&P 500 is off 1.75% in 2025, the Dow is down marginally, and the tech-heavy Nasdaq is down 5.3%, as of Wednesday morning.

But two groups of stocks have been bright spots: value stocks and European stocks. Value stocks are up more than 2% year to date, while European stocks are truly thriving, with the Stoxx Europe 600 up more than 9.5% YTD and surging (+4%) in the last month while U.S. markets have fallen apart. As I wrote in this space two weeks ago, it’s clear that investment dollars are being redistributed across the pond, at a time of great U.S. turmoil and uncertainty under a new administration, with stubborn inflation and still-high interest rates. Also, after more than a decade of growth being king on Wall Street, investors are starting to embrace a value mentality, and the many unloved sectors that have been largely on the sidelines during the last two-plus years of the bull market are finally getting some attention.

So, in this month’s issue of Cabot Value Investor, we lean into the two asset classes that are actually working right now by adding a European value stock to our Buy Low Opportunities Portfolio. It’s a stock I highlighted briefly in this space a couple weeks ago. And it’s very similar to Aviva (AVVIY), a stock we just sold last week after it (finally) reached our price target. In fact, its profile is almost identical: It’s a boring life insurance company based in Europe. But like Aviva, it’s also undervalued, growing earnings at a double-digit clip, and its shares are back in favor – but still trading well off their highs.

New Buy

Aegon Ltd. (AEG)

Aegon is a mid-cap ($10.5 billion) Dutch life insurance and financial services company that’s nearly 180 years old. Its largest and perhaps most recognizable business is Transamerica, a leading provider of life insurance, retirement and investment solutions in the U.S. With more than 10 million customers, Transamerica targets America’s “middle market,” and its wholly owned insurance agency World Financial Group – which boasts 86,000 independent insurance agents – helps facilitate the insurance part of Transamerica’s business plan.

Aegon also does business in the United Kingdom, as Aegon U.K. is a leading investment platform with 3.7 million customers and is trying to become the U.K.’s leading digital savings and retirement platform. Aegon Asset Management is the company’s global asset management wing. And Transamerica Life Bermuda is the name for Aegon’s life insurance business in Asia. The company has customers all over the globe, with major hubs in Spain, Portugal, France, Brazil and China.

Aegon’s sales peaked in 2019, when the company raked in a record $68.7 billion as the pre-Covid market hit a crescendo. Covid hurt ($42 billion in 2020), and the 2022 bear market hurt even worse (Aegon actually lost $4 billion that year), but the company has since rebounded, with 2023 revenues coming in at $32 billion. While revenues mostly held steady in 2024, the company became profitable again, reporting $797 million in net profits in the second half of 2024 alone, with free cash flow of $414 million. This year, the company expects its operating capital generation (the amount of capital a company generates from its ongoing business operations, excluding one-time events) to improve 46% this year 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 5.8%.

All of it was enough to convince Bank of America to upgrade AEG to a Buy late last year, setting a price target of 7, which would be a new all-time high. The stock currently trades at 6.25, down from its May 2024 peak of 6.89 but up 4.5% year to date. Shares trade at less than 8x forward earnings estimates, 0.4x sales and have an enterprise value/revenue ratio of just 0.33 – 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. I think it has a similar return potential to AVVIY (roughly 30%), but given the shift toward Europe and value, it can get there much quicker – perhaps by year’s end. BofA set its price target at 7 back in November, when AEG shares were lower and European stocks were mostly an afterthought in the wake of Donald Trump’s second election. I think that target looks conservative. I’ll set our target at 8 per share, or 28% higher than the current price. 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 Aegon Ltd. (AEG) with an 8 price target

Sell Remaining Half in United Airlines (UAL)

Peloton (PTON) Moves from Buy to Hold

Last Week’s Portfolio Changes

Aviva (AVVIY) Moves from Buy to Sell/Retire after reaching its price target

Upcoming Earnings Reports

Tuesday, March 11 – 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.

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. It 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 11.5x 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 down 5% this week as U.S. financials took a beating from all the tariff news. But there was no company-specific news, so the selling is likely overdone. The ex-dividend date is tomorrow (March 7), with a current dividend yield of 2.4%.

BAC shares peaked at just under 48 a month ago and have been getting beaten up since, due mostly to the weakness in U.S. stocks. A turnaround would likely rejuvenate shares, and with the bull market still intact and investor sentiment overly pessimistic at the moment, I expect one to arrive, perhaps by month’s end.

In the meantime, BAC stock 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, it’s on track for $106.4 billion, or 25% growth, with another 20% 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 19x 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 (1.38) 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 gave back all of its 8.5% gain (and then some) from the previous week after a sale of its Hong Kong shares sparked some residual selling. The sale raised $5.2 billion, and the company sold its Hong Kong shares at an 8.4% discount to their current value – roughly equivalent to Monday’s selloff. I don’t think this means company executives are “selling high” on the stock and they think it no longer has upside. Rather, the company says it plans to use the proceeds from the sale to invest in research, development and overseas expansion. Despite its attempts to expand globally, BYD still does 90% of its business in China – something the EV maker is trying to change. Regardless, I think Monday’s pullback on the stock sale is a temporary phenomenon (and the bounce-back from 87 to 90 on Tuesday and Wednesday support that), and this looks like a good entry point into a stock that was going nowhere but up until the last week.

Three weeks ago, BYDDY shares blew past our initial 90 price target on the heels of its investor showcase announcement that it was entering the self-driving technology and AI space (along with a new deal with DeepSeek), so we moved the goalposts and upped our target to 115. Shares have 27% upside to our new price target. 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.

Despite some recent strength in the stock, CAKE shares trade at 13.6x 2025 EPS estimates and at 0.69x 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 roughly 15% below their 2017 and 2021 highs, there’s plenty of room to run.

CAKE shares have given back all of their earnings gains, tumbling 6.5% this week as tariff news has wreaked havoc on the market. But the earnings were good.

The results came in ahead of both top- and bottom-line estimates, with EPS of $1.04 handily beating estimates of 92 cents, while sales of $921 million edged the $912 million expectation and marked 5% year-over-year growth. For full-year 2024, EPS came in at $3.28 (+56% year over year), while revenue was $3.58 billion (up 4.1%). Also, profit margins improved to 4.4% from 2.9% in 2023.

I’m guessing investors will reward CAKE for the solid quarter once the market can finally get its act together. Shares have 30% 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, the top line is on track to top $13 billion for the first time. It should top $13.5 billion in 2025.

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 14.3x 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.

DKS shares tumbled 5.5% this week on no company-specific news. The company reports earnings next Tuesday, March 11, so perhaps that will help right the ship, as it has in recent quarters. In November, the Q3 earnings report sent DKS shares from 194 to 215 in just a couple trading days; an even bigger jump (from 195 to 227) occurred after the Q1 report last May.

Analysts aren’t expecting much this quarter: a 2.85% decline in sales, with a 10% pullback in EPS. But Dick’s has a knack for topping EPS estimates, having done so in each of the last four quarters. Let’s hope another big post-earnings bounce is coming. After nearly reaching our 250 price target a month ago, shares have pulled all the way back to 211. They have 18% upside to our price target. BUY

United Airlines (UAL) – In 2024, airline stocks were one of the most remarkable growth stories on Wall Street, and UAL shares led the charge, outperforming Nvidia (NVDA) over one 12-month span. But it seems the air has come out of the airlines’ balloon, plagued by a combination of ugly headlines (planes overturning or crashing, including the tragic accident near Reagan Airport last month) and mixed earnings reports. While the industry is coming off a record year for passengers and United’s earnings were results remained stellar in its most recent quarter, I’ve pledged not to hang on to this one too long, as it surpassed our 70 price target months ago and kept motoring to more than 110 a share after the earnings report in late January. Now it’s pulled back to less than 90 a share.

Fortunately, we recommended selling half your shares shortly after the stock blew past our 70 price target last October. I recommended letting the remaining half ride and not selling until the seemingly unstoppable stock gave us a reason to. It’s now giving us a reason to, with shares nearly 20% off their late-January highs.

It’s been a great run with United, whose shares have produced a roughly 80% gain for us in 10 months, even with the recent downturn. Let’s tip our cap, book the full profit, and make room in the portfolio for the next UAL. SELL REMAINING HALF

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 two 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 9.9x earnings estimates and at just 1.49x sales. A solid dividend (2.9%) adds to the appeal of this mid-cap stock.

ADT gave back most, but not all, of its earnings gains from the previous week, tumbling nearly 5% this week on no news. The earnings were mostly good: Fourth-quarter revenue improved 8% year over year, while adjusted EPS for full-year 2024 improved 25%. The company also reported record monthly revenue and customer retention. With improved cash flow (profit margin was up to 13% from a net loss in FY ’23), the company also announced a $500 million share repurchase plan this year.

There were some weak spots, however. Full-year 2024 revenue was down 1.7% year over year, and full-year EPS (69 cents) fell short of analyst estimates by 7%. So, the giveback in the share price after the initial fervor – at least in a down week like this one – is reasonable. Overall, however, the 2024 and fourth-quarter results for ADT were encouraging and only strengthened our conviction that there’s plenty of upside ahead. Specifically, ADT has 31% to go until it reaches our 10 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 $80 billion, 170 million customers in over 30 countries, that pays a dividend (1.9% 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 0.35x 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 shares continued their comeback, even in the face of the worst week for the market since last August. Shares were up only about half a percent this week but are now up more than 11% year to date and more than 16% since bottoming in mid-December. There was no major news. The company will present at the Barclays 27^th Annual Global Healthcare Conference on March 12, which could potentially move the needle for shares. But right now, CI has the most momentum of any stock in the Value Investor portfolio, and healthcare stocks as a group have been relatively immune to the recent selloff.

CI shares have 36% 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.

PTON shares imploded this week, falling 11% on no news. After getting a big bump after a good earnings report in early February, PTON shares have squandered all of that momentum and are trading at their lowest point since Halloween. Given that there was no obvious reason for the pullback other than market forces coming for growth stocks with meat on the bone in recent weeks, I doubt it has much further to fall. But having lost nearly a third of its value in less than a month, it’s time to move PTON to Hold until it can re-prove itself. MOVE FROM BUY TO HOLD

The next Cabot Value Investor issue will be published on April 3, 2025.

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