January 23, 2025

Has the Next Big Market Rally Already Begun?

What a difference a week makes!

Early last week, things were looking pretty gloomy for the market, with stocks on a six-week losing streak dating back to early December and interest rates, as measured by the 10-year Treasury yield, stretching to 14-month highs. More than 300 stocks on the New York Stock Exchange and Nasdaq were trading at 52-week lows.

But in just seven trading days since the S&P 500 bottomed on January 10, several factors have totally flipped the script: December inflation came in cooler than expected, at least on a core basis; fourth-quarter earnings season got off to a promising start after several of the big banks reported strong results; Donald Trump was sworn in to his second term as president and did not immediately enact any tariffs on China, Canada, Mexico, etc., as many on Wall Street had feared; and Netflix (NFLX) reported a record number of new subscribers in Q4, pushing its share price to new heights on Wednesday.

Oh, and Treasury yields – the “only number that matters in today’s market,” as I wrote last week – tumbled from 4.8% to less than 4.6%. They’re not quite below the magical 4.5% level yet, but they’re also not knocking on the door of 5%, which is a psychological anvil weighing down stock prices. Where they go next may come down to what Fed Chairman Jerome Powell says at his press conference next Wednesday, January 29.

For now, the script has completely flipped on Wall Street. Stocks have risen in six of the last seven trading days and are on the cusp of all-time highs again. The number of 52-week lows has plummeted to just 64 as of this writing – while 225 stocks on the Nasdaq and NYSE are trading at 52-week highs. And breadth has improved dramatically – the Equal Weight index is up 5% since the start of last week, small caps have advanced nearly 6%, and value stocks are also up 5%.

So, our portfolio is in great shape, having weathered the December and early-January downturn. Perhaps the next up-leg of this bull market is upon us. Better yet, maybe this time the rally will be more inclusive than it often has been these last two years, and that across-the-board buying is here to stay, at least for a little while. It’s very possible the Fed will throw cold water on the rally yet again next week. But for now, all we can do is trust the evidence in front of us, which shows that all arrows are pointing up.

I’ll paraphrase two of my Cabot colleagues here: Mike Cintolo often says that the real money is made in the “big swing” that takes place at the start of a rally. And as Brad Simmerman, co-host of our weekly Street Check podcast, said on a recent episode: trust early rallies. Don’t wait for them to go on for days or weeks before jumping back into the pool. So, if you have been waiting for the right time to buy or add to any of the positions in our Cabot Value Investor portfolio, now is the time to do it.

We’ll worry about the next Fed speech, the next set of big earnings results and the next inflation report when they come. For now, trust the newfound rally – and profit from it.

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
Thursday, January 30 – The Cigna Group (CI)

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 16.3x 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 (1.10) 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 has announced a new partnership with Grab, Southeast Asia’s leading ride-hailing platform. Under the agreement, Grab drivers in fast-growing Southeast Asia will have access to as many as 50,000 BYD cars. In other Southeast Asia news, BYD says it plans to complete construction on a $1 billion plant in Indonesia by the end of this year. Both announcements are the latest evidence of BYD’s global expansion outside of China, which is likely the key to launching the company into the mainstream – and the share price into the stratosphere.

The dual announcements this week, combined with a strong market, were enough to push BYDDY shares up nearly 7% since we last wrote. Though not quite back at their December highs north of 72, the quick rebound in BYDDY shares shows they have institutional support, which could help the stock weather any upcoming news about China tariffs (which wouldn’t affect BYD much anyway since it does not sell cars in America yet).

BYDDY has 26% upside to our 90 price target, which is looking more conservative by the day. 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 this year.

It’s still expanding too, opening 17 new restaurants through the first three quarters of 2024. 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 14x 2025 EPS estimates and at 0.71x 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 20% below their 2017 and 2021 highs, there’s plenty of room to run.

There was no company-specific news for Cheesecake Factory this week, but shares were up more than 6% thanks to a boost from the market and strong earnings results from fellow national restaurant chain Cracker Barrel (CRBL).

The last bit of company-specific news came all the way back 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 25% upside to our 65 price target. The 2.1% 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 less than 16x forward earnings estimates and at 1.45x 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, but the stock was up 3.5% and is on the precipice of breaking through long-held resistance at 235. If it does, that could catapult shares all the way to our 250 price target in short order.

The stock has been on an upward trajectory since reporting earnings in 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 growth 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 10% since the earnings report. They have 6% 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 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.

On the heels of a strong week for the stock (+6.5% gain), TOL shares took a breather this past week, with the share price virtually unchanged. While interest rates have retreated from 14-month highs in the past week, mortgage rates have not, topping 7% for the first time since last May. Until those come down, TOL’s share price will likely be capped, at least to a degree.

Still, the cooler inflation reports last week were good news for Toll Brothers and other homebuilders, as they quieted talk of fewer Fed rate cuts this year and have taken the extreme view that the Fed might actually hike rates by year’s end off the table, for now.

So, let’s continue to play the long game with TOL. TOL shares have 34% upside to our 180 price target. At 9x forward earnings, shares are incredibly cheap. BUY

United Airlines (UAL) reported another record quarter on Tuesday. Revenue came in at $14.7 billion, ahead of the $14.47 billion analyst estimate, while adjusted earnings per share came in at $3.26, well ahead of the $3.00 estimate. Sales improved 8% year over year while net profits increased 64%. Better yet, United upped its EPS guidance for the current quarter, to a range of 75 cents to $1.26 – way beyond the 54-cent analyst estimate.

Soaring travel demand post-Covid, a booming loyalty program, and higher prices for seats, especially in business class, helped buoy United to its best year ever. Meanwhile, its cheaper economy seats saw a 20% sales bump in Q4.

The latest stellar quarter from United pushed shares up another 4.5%; the stock is now up 185% in the last 12 months. Having added UAL to the Cabot Value Investor portfolio last May, we now have a 118% gain on it. We sold half our position in November after the stock blew past our 70 price target. It’s just kept on rising since and has actually outperformed Nvidia (NVDA) in the past year.

Is a comeuppance coming? Perhaps. But UAL has shown zero signs of one, even as the market flailed for six weeks in December and early January. And the stock is still cheap, trading at 8.6x EPS estimates and 0.65x sales. So let’s ride our remaining half position until the stock gives us a reason to part ways with it. 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 9.6x earnings estimates and at just 1.3x sales. A solid dividend (3.0%) adds to the appeal of this mid-cap stock.

There’s been no company-specific news for ADT of late, and shares have stabilized the last couple weeks after selling off for most of December. The stock was unchanged this week after rising 2.5% last week.

There’s been no real news since late October when 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. They eventually sagged back to pre-earnings levels but are now gaining steam again. But the stock remains cheap, trading at 9x forward earnings. The shares have 39% 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 were down more than 7% in the weeks after its Direct Line takeover was first reported on November 27 – which is normal share price action for the acquiring company. But they have since recovered all of their losses, though most of the recovery didn’t happen until this week when AVVIY shares were up 6% on no news.

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 $16.9 billion. That gives AVVIY shares 25% upside from their current price. The 7.1% dividend yield adds to our healthy return thus far. 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 (2% 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 9.1x earnings estimates and 0.36x 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 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.

Cigna shares have been in slow but steady recovery, advancing another 2% this week on no news. The company reports earnings a week from today, on January 30. The stock was beaten up after a series of bad news events hit healthcare companies hard, including news that it – along with UnitedHealth and CVS – was one of the biggest big pharma abusers of using so-called “middlemen” to peddle their drugs, for large fees, resulting in a combined $7.3 billion in excess revenue over a six-year period. But it seems Wall Street is starting to “get over it,” and big pharma stocks have been recovering.

We downgraded CI to Hold a few weeks after it got off to a rough start. Let’s keep it at Hold until we see more momentum in the share price – which could come after next week’s earnings report. HOLD

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 700% – 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 1.16x 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.

Peloton and Target (TGT) are joining forces. Peloton is selling some of its apparel and merchandise – more than 140 items of it – on Target Plus, a similar arrangement to the one it had with Nordstrom over the holidays. It’s part of the company’s marketing strategy to use high-profile third-party marketplace collaborations to reach new customers.

Despite the news, PTON shares were down more than 4% in the last week. However, since dipping below 3 per share last August, PTON has more than tripled. And yet, shares remain cheap on a price-to-sales basis, and sales are no longer cratering the way they were in 2022-23 and are actually expected to start expanding again in the next (2026) fiscal year, which begins in July.

Earnings are due out in a couple weeks so those will likely determine if the stock can keep up its recent momentum. Shares have 41% upside to our 12 price target. BUY

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

Current price is yesterday’s mid-day price.

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