February 27, 2025

Stocks Had a Bad Week. That’s Not a Bad Thing

Last Friday on the Cabot Street Check podcast I co-host with my colleague Brad Simmerman, I predicted that a 5% market pullback was forthcoming after a month of stagnation. We’re more than halfway there already: the S&P 500 is 3% off its highs entering Thursday and narrowly halted a four-day losing streak on Wednesday.

My reason for thinking a mini-correction was imminent was simple: a strong fourth-quarter earnings season had been helping to counteract all the bad news (tariffs, escalating inflation, stagnant interest rates, etc.) that’s impacted the market over the past six weeks … and Q4 earnings season is now effectively over. Sprinkle in the fact that the S&P had actually poked its head above new all-time highs just over a week ago, and a pullback of some kind seemed almost inevitable.

It’s not a bad thing.

Market re-ratings are healthy, and this market was certainly due for one, with the S&P trading at its highest price-to-earnings ratio since March 2021. On a forward basis, the P/E ratio isn’t as lofty, thanks to the strong earnings forecasts for the year ahead. Nevertheless, the market had gotten a bit pricey, and this pullback could create some better entry points down the road. And, even if this pullback does cross the 5% threshold in the coming days, chances are it won’t last long.

Since this bull market began in October 2022, there have been three pullbacks of 5% or more in the S&P 500. The first one came in February and early March of 2023, when the index declined around 6.5% in just over a month. It took little more than a month for the index to reclaim all its losses.

From late July 2023 through late October of that year, the S&P declined more than 10% - a true correction. Again, it took only a month for stocks to fully recover, as the index reached new highs by that Thanksgiving.

Finally, there was the steep correction last July and August, when the S&P declined 8.8% and the Nasdaq a whopping 14% from mid-July through the first week of August thanks to the so-called Japanese carry trade and a bad jobs report in the U.S. The market had recovered all its losses by the end of August and was racing to new highs by the third week of September.

That’s three pullbacks of 5% or more, and every time, stocks took no more than a month to fully recover the losses. At a certain point, investors spotted a bargain and pounced. With the bull market still relatively young, no recession in sight and inflation – while persistent – not meaningfully worsening (yet), there’s every reason to believe the market will bounce back to new heights after the current re-rating. But it’s likely the re-rating process – just a week old – will take another few weeks to fully play out.

So today, we’re sticking with most of the stocks in the portfolio, despite some turbulence over the past five trading days, and plan to add a new stock in the March issue next Thursday. The lone exception this week? Aviva (AVVIY), which has finally reached our price target after nearly four years! We are “retiring” that position after the company beat earnings this morning. Details below.

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

Last Week’s Portfolio Changes
Toll Brothers (TOL) Moves from Hold to Sell
The Cigna Group (CI) Moves from Hold to Buy

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.

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 11.9x 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.

The only news for Bank of America this week is that it plans to launch its own stablecoin, according to CEO Brian Moynihan. It’s a sign that BofA, historically one of the stodgier and traditional of the largest U.S. banks, is open to trying new things to keep up with the times – cryptocurrency has rarely been a major part of the bank’s arsenal. If U.S. lawmakers approve a dollar-backed stablecoin – a move that President Trump said he plans to greenlight in his first 100 days in office – Moynihan says the bank will launch a Bank of America stablecoin that will act “just like another foreign currency.”

BAC shares were down 3% this week, though that was likely in step with the 3% market pullback. The stock has 28% 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 22.5x earnings estimates, BYDDY currently trades at roughly a quarter of its five-year average forward P/E ratio (89.6). And its price-to-sales (1.55) 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.

BYDDY shares just keep rising, up another 8.5% this week despite the sharp market downturn. The driving force behind BYD’s monster February – shares are up 45% this month alone – continues to be its new self-driving platform and accompanying AI features, which will be aided by a deal with headline-making Chinese AI upstart DeepSeek.

At its investor showcase event earlier this month, the Chinese electric vehicle maker announced that it has started offering advanced autonomous driving features, dubbed “God’s Eye,” on most of its models, including its low-priced ($9,555) ones. Additionally, BYD has said it plans to invest about $14 billion in AI and automotive intelligence technology spearheaded by an army of more than 5,000 engineers. New breakthrough technologies for BYD’s cars could give it an even tighter stranglehold on the Chinese EV market, where Tesla’s sales have been slumping as more people gravitate to BYD’s lower-priced car options. The new God’s Eye feature could also make BYD more appealing to the many new markets it’s trying to conquer, including Europe and Southeast Asia.

Two weeks ago, BYDDY shares blew past our initial 90 price target, so we’ve moved the goalposts and upped our target to 115. That’s already looking conservative, as shares have already risen to 102. This God’s Eye feature could really be a game-changer for BYD and just the thing to help catapult it from a Chinese EV power to a global one. 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 14.5x 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 roughly 15% below their 2017 and 2021 highs, there’s plenty of room to run.

CAKE shares gave back roughly 3% after last week’s earnings report after running up 8.5% ahead of it. All in all, the report was solid, and the stock is up. 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 margin improved to 4.4% from 2.9% in 2023.

The stock has 21% upside to our 65 price target. BUY

Dick’s Sporting Goods (DKS) has been growing steadily for years.

From 2016 to 2023, the sporting goods chain’s revenues have improved 64%, from just under $8 billion to just under $13 billion. In 2024, 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 16.4x forward earnings estimates and at 1.5x 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 pulled back 2.5% this week in sympathy with the market downturn. There was no company-specific news. The company reports earnings on March 11.

Three prominent Wall Street firms (TD Cowen, Morgan Stanley, Argus Research) have raised their price targets on DKS in 2025, all of which are higher than our 250 price target. Earnings reports have acted as a springboard for the share price in recent quarters, and that could be the case again next month.

DKS currently has 11% upside to our 250 price target. BUY

United Airlines (UAL) – People are flying in planes again in Covid’s aftermath, and no major airline is taking advantage of it quite like United.

United Airlines is the fastest-growing major U.S. airline. The third-largest airline carrier in the world by revenues behind Delta (DAL) and American (AAL), United is expected to grow sales by 7.3% in 2025 – more than its two larger competitors – and that’s with revenues already topping a record $53 billion in 2024 – 6% higher than in 2023, which was also a record year. For United, business has not only returned to pre-pandemic levels; it’s better.

Meanwhile, the stock is super cheap. It trades at a scant 7.6x forward earnings estimates, with a price-to-sales ratio of just 0.57.

A company that’s making more money than ever before (gross profits reached a record $19.4 billion in 2024, though earnings were still second to 2019 levels on a per-share basis), and yet its stock trades at barely more than half its peak from five and a half years ago. A true growth-at-value-prices opportunity.

UAL shares have finally hit a rough patch after going nowhere but up for months. The stock was down more than 10% this week on no major news, dipping below 100 a share for the first time since early January. However, most of the pullback occurred a week ago, when the market started to unravel, and shares have mostly held support around 95 since. Let’s see if they can bounce back as the airlines continue to thrive financially despite a recent spate of less-than-flattering news.

We sold half our shares in UAL when the stock blew past our 70 price target several months ago. Let’s hang in there with our remaining half. Further weakness could prompt us to sell the rest, but with no real reason for the recent selling aside from general market weakness, the stock looks as cheap as it has in months. HOLD 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 52 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 1.33x sales. A solid dividend (2.9%) adds to the appeal of this mid-cap stock.

ADT shares are up roughly 6% in early Thursday trading after Q4 earnings beat estimates this morning. 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, the company also announced a $500 million share repurchase plan this year.

I’ll have more color on the earnings results in next week’s issue once I’ve had more time to dig into them. But it’s clear that Wall Street likes them so far. ADT shares now have 25% upside to our 10 price target. BUY

Aviva, plc (AVVIY) has reached our 14 price target!

Shares of the London-based life insurance and investment management company pushed to our 14 price target this morning after reporting strong earnings results for the second half of 2024. Operating profits came in at 1.77 pounds, ahead of the 1.67 pounds expected. Higher premiums on its car and home insurance products helped account for the strong quarter.

Aviva is the last remaining stock in the portfolio that was picked by my predecessor, Bruce Kaser. And while it took a while to get there – almost four years to the date! – the stock has, at long last, reached Bruce’s 14 price target, giving us a 30% return. Let’s book that profit, “retire” AVVIY shares by selling out of our position in this slow-but-steady grower and open up another spot down the road for a stock with potential for more immediate upside. MOVE FROM BUY TO RETIRE

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.

The renaissance in Cigna shares continues, with the stock up another 2.5% this week and nearly 11% year to date. The only news is that the company will present at the Barclays Annual Global Healthcare Conference on March 12.

The stock dug itself quite a hole after a series of bad headlines for big healthcare companies late last year and early this year. A mixed earnings report in late January didn’t help matters, at least initially, but it seems Wall Street has warmed to the results, which actually weren’t that bad. Revenues improved 28% year over year and were 4% higher than estimates. For full-year 2024, sales improved 27%, while earnings per share climbed 9%. The bad news? Profits in Q4 declined 2.2% and were short of estimates by 15%. The reason for the EPS shortfall was mostly due to rising medical costs and a declining customer base, which fell 3.2% year over year, though premium rate hikes helped boost revenues. Cigna’s cash and cash equivalents slipped 3.5% to $7.6 billion.

We’re getting closer to breakeven on this stock after a very rocky start. We restored a Buy rating on this stock last week, and that’s looking like a good decision so far. CI shares have 37% 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.

Meanwhile, the company just underwent a regime change – always an appealing catalyst for turnaround candidates. Former Ford executive Peter Stern has taken over as CEO, assuming the helm from embattled former CEO Barry McCarthy after two mostly unsuccessful years on the job.

Add it all up, and suddenly there are a lot of potential catalysts for Peloton for the first time since the pandemic. And the stock has become grossly oversold, currently trading at 1.13x sales, about a quarter of its five-year average and galaxies below the 20x P/S ratio from late 2020 and even the 6.9x sales shares were going for in late 2021.

PTON shares had a terrible week, falling 21% to give back nearly all of its gains from the February 6 earnings report. There was no news, so the sharp nose-dive is likely market-driven, with growth stocks with “meat on the bone” getting pummeled over the last week.

Let’s maintain our Buy rating. If you have yet to add PTON shares to your portfolio, you can now get them at a much better price. If you bought earlier, you can potentially add to your position, as the selling is clearly overdone for a stock that did no wrong.

On the contrary, the latest quarter was stellar. Losses were more than slashed in half, from 54 cents a year ago to 24 cents this year. That was shy of the 18-cent loss analysts were expecting, but sales came in stronger at $673.9 million, ahead of the $654 million estimate but down 9% year over year. Furthermore, its new Strength+ feature topped the 220,000 monthly active users mark; gross margin reached 47.2%, topping estimates; operating expenses were down; and EBITDA came in way higher ($58.4 million) than analysts were anticipating ($26.7 million).

PTON now has 55% upside to our 12 price target. BUY

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

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