January 2, 2025

After a Down December, Value Opportunities Abound

It was a rare rough December for stocks.

Sure, the S&P 500 and the Nasdaq were down just over 2%, propped up as usual by enduring strength in the Magnificent Seven. But the losses were far greater in almost every other corner of the market, with 10 of the 11 major sectors declining, small caps tumbling nearly 8%, value stocks off by more than 6%, and energy and materials stocks retreating by double digits.

What does it mean? Probably that we were due for a pullback, perhaps even a correction. It may linger into January for a few weeks. But eventually, the bull market will resume – there are simply too many reasons (falling inflation and interest rates, a still-strong economy, the artificial intelligence growth driver, etc.) for it not to. And when it does, under-loved segments of the market will get some long-overdue attention – and that includes value stocks.

With that in mind, I’ll have another new pick next week – normally the first Thursday of the month is when we add to the portfolio, but our monthly issue is being pushed back a week due to the janky holiday week. (And by the way, Happy New Year!) Currently, eight of the 11 S&P sectors trade at cheaper valuations than the index itself, with energy, basic materials and financials all at dirt-cheap levels. So there’s a lot to choose from. But as always, I will be looking for a blend of value and growth, since the latter still dominates the market, as it has for the past decade-plus.

As I noted in last week’s update, the Cabot Value Investor portfolio (+7.4%) has outperformed the Vanguard Value Index Fund (VTV) (+5%) since I took the reins of this advisory last April. Here’s hoping that outperformance continues in 2025 – and that value stocks as a group play catch-up to the precious few growth-related titles that have led the charge for most of the last two years.

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
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.

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 15.7x earnings estimates, BYDDY currently trades at less than 20% of its five-year average forward P/E ratio (89.6). And its price-to-sales (1.06) 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.

The Chinese electric vehicle giant sold 207,734 EVs in December, pushing its 2024 total to 1.76 million battery-electric vehicles sold. Total vehicle sales improved 41% for the year, though the biggest jump came in the company’s hybrid models. While fourth-quarter results aren’t due out until March, its sales outpaced Tesla’s for the first time in the third quarter. To me, buying BYD now has the potential to be like buying TSLA shares 10 years ago.

Despite the strong December sales numbers, BYDDY shares are down 4.5% in the last week but remain well above their December lows. The stock has 32% upside to our 90 price target, which may prove to be conservative. 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 are on track for $3.57 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 are estimated to swell to $3.31 in 2024, a 57.6% improvement, and to $3.69 next year.

It’s still expanding too, opening 17 new restaurants year to date. It expects to open a total of 22 new restaurants by year’s end. 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 less than 13x 2025 EPS estimates and at 0.65x 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 roughly 25% below their 2017 and 2021 highs, there’s plenty of room to run.

There was no company-specific news for Cheesecake Factory this week, and the stock was down 1.5%. The stock has given back most, but not all, of its 10% post-Black Friday bump. It was up 35% in 2024.

The last bit of company-specific news came in late October when the company reported Q3 earnings, which were solid. Sales improved by 4.2% while diluted EPS expanded by 65%. Same-store sales increased 1.6%. The strong quarter got Wall Street’s attention: six major firms have either upgraded their price target or initiated coverage on CAKE since the report.

CAKE shares have 37% upside to our 65 price target. The 2.3% dividend yield adds to the appeal. 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 15.5x forward earnings estimates and at 1.4x 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.

There was no company-specific news for Dick’s this week, and shares were down very slightly after reaching their highest point in four months the previous week. The stock has been on an upward trajectory since reporting earnings in late November.

It was yet another solid quarter for the sporting apparel giant. Both sales and earnings topped estimates and, perhaps more importantly, the company raised full-year same-store sales guidance to a range of 3.6% to 4.2%, up from the previous range of 2.5% to 3.5%. Earnings per share improved 15% year over year, while sales ticked up only slightly. The company credited a robust back-to-school shopping season for its strength in the third quarter. Also, Dick’s is expanding its new House of Sport concept – 100,000-square-foot arenas that feature rock climbing walls and running tracks. It expects to open 15 new ones next year and is aiming for a range of 75 to 100 nationwide by 2027.

DKS shares are up 11% since the earnings report. They have 9% upside to our 250 price target. BUY

Toll Brothers (TOL) – Historically, when the Fed cuts interest rates, homebuilder stocks are among the first to benefit. Indeed, in 2019 and early 2020 (before Covid hit), during which the Fed cut rates from 2.5% to 1.5%, homebuilder stocks were up 64%, more than double the 30% bump in the S&P 500. Now, with the Fed finally cutting rates for the first time in four and a half years, the homebuilders are undervalued, trading at 13x forward earnings. Toll Brothers is even cheaper, trading at less than 9x estimates – and growing faster than the average bear. In fiscal 2024, revenue improved 10% year over year while adjusted EPS was up 12.7%, which compared favorably to 2023 results (13.6% EPS growth on a 2.7% downturn in revenues).

Toll Brothers isn’t the biggest homebuilder in the U.S. – its $10.5 billion in revenue last year paled in comparison to the likes of D.R. Horton’s ($35 billion), PulteGroup’s ($16 billion), or Berkshire Hathaway holding Lennar’s ($34 billion). But it’s cheaper and growing faster than all of them.

Interest rates were flat this past week, perhaps a sign that they’ve finally topped. TOL shares finally stopped falling too after a rough December in which the stock tumbled more than 23%. Eventually, however, the cumulative effect of lower interest rates – even if the Fed slashes rates at a slower pace than anticipated – will show up in both bond yields and, more importantly, mortgage rates. The Fed has already lowered short-term rates from a range of 5.25-5.5% to 4.25-4.5% in the last three-plus months. Another 50 basis points would get it down below 4%. And it won’t stop there.

So, let’s play the long game with TOL. TOL shares have 43% upside to our 180 price target. At less than 9x forward earnings, shares are incredibly cheap. 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 5.9% in 2024 – more than its two larger competitors – and that’s with revenues already topping a record $50 billion in 2023 – 19.6% higher than in 2022, 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 7.7x forward earnings estimates, with a price-to-sales ratio of just 0.58.

A company that’s making more money than ever before (gross profits reached a record $15.2 billion in 2023, 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.

2024 was an excellent bounce-back year for airline stocks, as the JETS ETF was up more than 33%. But no airline stock performed better than UAL, which ascended 135% to reach new all-time highs. Having recommended the stock back in May, we captured the majority of those gains, as shares raced past our price target (70) in October and had exactly doubled as of last week. They pulled back 3.5% this week, but Raymond James raised its price target on the stock from 90 to 120 – 23% higher than the current price.

We sold half our shares in November and are letting the rest ride but are maintaining a Hold rating. Any real turbulence will likely prompt us to bail on this big winner before our remaining profits erode much. For now, though, it still looks good, and one down week after topping 100 for the first time ever doesn’t change that. 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; in 2024, EPS is expected to improve another 43%, to 73 cents, and then to 83 cents (+14%) in 2025.

All of that EPS growth makes the share price look quite cheap. ADT shares currently trade at just 9x earnings estimates and at just 1.21x sales. A solid dividend (3.1%) adds to the appeal of this mid-cap stock.

There’s been no company-specific news for ADT of late, and shares finally stabilized this past week after selling off for most of December. The stock still trades at two-month lows, but perhaps the worst of the selling is over.

In late October, ADT reported earnings that beat on both the top and bottom lines. Adjusted EPS of 20 cents topped 17-cent estimates, while revenues ($1.24 billion) narrowly edged estimates ($1.22 billion) and marked a 5% year-over-year improvement. EBITDA ($659 million) also came in slightly higher than expectations. Meanwhile, the company maintained its full-year revenue guidance of $4.9 billion and raised EPS guidance to 73 cents at the midpoint – a 3.6% increase. Its recurring monthly revenue reached $359 million, a new record.

The numbers weren’t jaw-dropping, but there was a lot to like in the report, and investors quickly snatched up ADT shares accordingly – they were trading below 7 prior to the report. Now, they’ve fallen back roughly to their pre-earnings levels. So, the stock remains cheap, trading at 9x forward earnings. The shares have 44% upside to our 10 price target. BUY

Aviva, plc (AVVIY), based in London, is a major European company specializing in life insurance, savings and investment management products. Amanda Blanc, hired as CEO in July 2020, is revitalizing Aviva’s core U.K., Ireland and Canada operations following her divestiture of other global businesses. The company now has excess capital which it is returning to shareholders as likely hefty dividends following a sizeable share repurchase program. While activist investor Cevian Capital has closed out its previous 5.2% stake, highly regarded value investor Dodge & Cox now holds a 5.0% stake, providing a valuable imprimatur as well as ongoing pressure on the company to maintain shareholder-friendly actions.

Aviva has finalized its agreement to buy Direct Line Insurance Group for 3.7 billion pounds ($4.65 billion), creating the largest motor insurance company in the United Kingdom. The deal is expected to be completed by mid-2025. AVVIY shares are down more than 7% since its Direct Line takeover bid was first reported on November 27 – which is normal share price action for the acquiring company. But shares should eventually bounce back, as the Direct Line addition should give this U.K.-based insurance and investment management firm a market cap of $21.2 billion, up from its current $15.7 billion. That gives AVVIY shares 35% upside from their current price. The 7.4% dividend yield should tide us over until shares get going again. BUY

The Cigna Group (CI) is the fifth-largest healthcare company in the U.S., with $229 billion in revenue over the last 12 months. It’s a health benefits and medical care provider with a market cap of $82 billion, 170 million customers in over 30 countries, that pays a dividend (1.8% yield) and is on track to grow sales by 25% and earnings by 13.5% this year and another 10.8% next year. And yet, the stock hasn’t budged much in two years and trades at a mere 8.8x 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% last year and 31.4% in 2021. But that appears to be changing, with double-digit growth expected both this year and next, led by its Evernorth Health Services branch, which reported 36% 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.

Our timing wasn’t the best here. We added Cigna (CI) to the portfolio just before the murder of UnitedHealth Group (UNH) CEO Brian Thompson shined a light on societal anger toward health insurers; before lawmakers began threatening big pharma companies to sell off their pharmacies; and before President-elect Donald Trump singled out pharmacy benefit managers – known short-hand as “middlemen” – as being “horrible,” vowing to “knock them out.”

That’s quite a two-week stretch of bad headlines. And it’s taken a toll on healthcare stocks, which were down 6.7% in December after already entering the month as one of the worst-performing sectors of 2024. As one of the biggest health insurers in the U.S., Cigna has been in the crosshairs more than most healthcare stocks of late, hence the 17% dropoff in December – although shares have stabilized in the past two weeks.

None of that rhetoric changes the fact that Cigna is still growing just fine, or that the stock is undervalued (even more so now), or that, as one of the largest healthcare companies in the U.S., it should benefit from the unstoppable trend of an aging population. Nevertheless, the stock is not the company, and with CI performing poorly since we added it to the portfolio, we downgraded CI shares to Hold two weeks ago until they start proving themselves. If you already bought on my recommendation in early December, hang in there. If you haven’t, hold off for now. But I think the worst of the selling may be close to over, and soon this imperfect storm will pass. HOLD

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.