March 13, 2025

Cooler Inflation Offers the Market a Life Raft. But Value Stocks Were Already Afloat

It’s amazing what a halfway decent inflation report can do.

On Wednesday, the Consumer Price Index (CPI) came in both lower than expected and better than the previous month at 2.8%. Economists were looking for a 2.9% year-over-year gain, down a tick from the 3% gain in January. Instead, it’s down two ticks and up just 0.2% from January – again, a tick less than the 0.3% month-over-month gain that was estimated. So, Wall Street rejoiced, at least for a few hours. All three major indexes were up more than 1% in early Wednesday trading, a welcome reprieve after weeks of getting pummeled into either correction status (the Nasdaq) or near-correction territory (S&P 500 and the Dow). Yes, the thing that’s been feeding this forceful sell-off – tariffs, and an ever-escalating trade war with multiple countries – is still raging. But higher inflation is a big reason people fear tariffs in the first place. And for one month at least, inflation came in cooler than expected.

Perhaps stocks will follow a similar pattern to what happened after an equally “cool” inflation report was released in mid-January. The S&P was up nearly 5% in the ensuing 10 days and eventually reached new all-time highs by the third week of February. The difference this time is that stock prices were much more depressed heading into yesterday’s inflation report, with the S&P down 9.3% from its February 19 high and the Nasdaq down 13%. So, if bargain hunters were looking to pounce on the first bit of good news, it’s possible a nice recovery is in order in the back half of March.

Of course, our timeline as value investors is much longer than half a month. We can afford to be patient through all the volatility and uncertainty the tariffs, trade war, stagnant interest rates and looming specter of higher inflation have wrought. And looking at the market from a 10,000-foot view, the picture looks quite encouraging: a bull market, coming off a sharp correction, with value stocks in the driver’s seat. Indeed, at a time when growth stocks have cratered, falling more than 10% year to date, value stocks are actually up slightly so far in 2025. In times of such uncertainty and with the potential for muted growth, value stocks represent a safe haven. And after 28 months of a bull market in which only a select few have led the charge and many sectors have been left in the dust, there’s a lot of great value opportunities out there.

Right now, we have a portfolio of nine stocks that look poised to take full advantage of the current value-centric climate. Some of them already are. Last week we sold the remaining half of our best performer, United Airlines (UAL), for an 80% profit in just 10 months. I think there are several stocks in our current portfolio with that kind of potential. And after a sharp drop in prices over the last three weeks, I expect shares across the board to be higher between now and year’s end – with value stocks now leading the charge.

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.

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This Week’s Portfolio Changes

Dick’s Sporting Goods (DKS) Moves from Hold to Buy

Last Week’s Portfolio Changes

Buy Aegon Ltd. (AEG) with an 8.00 price target

Sell Remaining Half in United Airlines (UAL)

Peloton (PTON) Moved from Buy to Hold

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 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 5.8%.

AEG shares trade at less than 8x forward earnings estimates, 0.4x sales and have an enterprise value/revenue ratio of just 0.32 – 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 flat in their first week in the portfolio. There was no company-specific news. The stock is up more than 6% year to date but trades well off its highs from last May. AEG has 28% upside to our 8 price target. 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. 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 10.7x 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 1.1x book, cheaper than all but Citigroup among the big banks), and share price momentum makes for an enticing formula.

BAC shares pulled back more than 5% last week on limited company-specific news. The only newsworthy tidbit is that the bank is making cuts to its investment banking division, which comes on the heels of the company laying off about 1% of its workforce following performance reviews. That’s not uncommon among big banks – Goldman Sachs is planning on laying off 3% to 5% of its workforce, according to Reuters.

It’s doubtful the minimal cutbacks had much of an impact on shares. Fears of a recession and higher inflation in the face of escalating tariffs under the Trump administration are more impactful – financials as a group were down 5% this past week, identical to BAC’s drop-off. Perhaps Wednesday’s better-than-expected CPI report can reverse the trend.

BAC has 43% 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 (1.39) 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.

Tesla’s losses are BYD’s gains, it seems. At a time when TSLA shares are nose-diving (-39% year to date), BYDDY is thriving, up more than 33% year to date, including roughly half a percent this past week. The difference is stark: BYD is growing revenues and earnings at a time when Tesla’s are declining, and BYD is delivering on its promises of self-driving technology and AI capabilities. Last month, the company said it plans to offer self-driving technology – called “God’s Eye” – in all its models, and it subsequently signed a deal with up-and-coming, news-making Chinese AI company DeepSeek.

BYD is dominating in China, where Tesla’s sales plummeted by 49% in February. But BYD has ambitions beyond China, where it currently does 90% of its business. Setting its sights on Southeast Asia, Europe and Latin America, with new plants opening in each of those high-growth regions, BYD is aiming for a global takeover. Because of that, I think our 115 price target – already upped from 90 after the stock topped our initial target last month – is still too modest. 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 12.7x 2025 EPS estimates and at 0.64x 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 20% below their 2017 and 2021 highs, there’s plenty of room to run.

CAKE shares tumbled 6% this week on no news. The pullback was likely in sympathy with the market.

The recent selling in CAKE seems overdone for a company coming off another strong quarter. In late February, the restaurant reported results that came in ahead of top- and bottom-line estimates. EPS of $1.04 handily beat 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 38% 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.

Dick’s reported earnings on Tuesday, and unlike after past earnings reports, the stock did not get an immediate bump. DKS shares, in fact, are down 7.5% since the report. The results were fine: the sporting goods store beat Q4 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.

So why the sell-off? Because guidance came in a bit cautious. 2025 sales guidance came in on the low end of estimates, while EPS guidance actually trailed previous expectations. However, Dick’s CEO said it lowered guidance as a precaution to account for tariff uncertainty, something many companies have done in recent weeks. So chances are, the selling the last couple days was overdone. If the market can get right and build off of Wednesday’s turnaround, I think a swift bounce-back in DKS shares is in order given the strength of Dick’s fourth-quarter results.

DKS shares have 28% upside to our 250 price target. Let’s upgrade the stock back to Buy. MOVE FROM HOLD TO 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 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 shares tumbled more than 3% this week on no news. The stock is still up nearly 7% year to date but is now flat since reporting earnings in late February. 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 weak market 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 35% 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 10.7x earnings estimates and 0.37x 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 just keep inching higher, even in the face of an aggressive market sell-off. The stock was up slightly on no news and is now up more than 12% year to date, recovering most – but not all – of its sharp December dip. Healthcare stocks have been the best-performing sector year to date – a complete reversal from 2024 – which has helped. But the real catalyst may be CI’s depressed value after the December sell-off – the stock still trades at a mere 10.7x forward earnings and just 0.37x sales. That’s uncommon value for a blue-chip health insurer.

With plenty of momentum, the stock still has 35% 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 continued their freefall, plummeting another 13% after pulling back 11% last week. There was no news. But small-cap stocks are feeling the brunt of the current market sell-off more than perhaps any other asset class, and Peloton is a small-cap stock. It now trades at its lowest point since October.

We downgraded PTON shares to Hold last week due to the recent weakness and will keep it right there. We won’t hold and hope forever with this one, but let’s see how it behaves in a market that’s not cratering. HOLD

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

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