November 21, 2024

Quick programming note: Due to the Thanksgiving holiday, there will be no Cabot Value Investor update next Thursday. We will be back on Thursday, December 5, with our December issue. If anything major happens between now and then that might affect the ratings on any of our stocks, I will send out an alert. Until then – Happy Thanksgiving!

Now, as promised last week, I have a new recommendation for our Growth & Income Portfolio today. So let’s get right to it.

Tesla’s Greatest Competitor … at One-Sixth of the Price

Tesla (TSLA) is getting lots of headlines these days, and for good reason.

Their CEO and founder, Elon Musk, was tabbed by President-elect Donald Trump to head up something called the Department of Government Efficiency (along with Vivek Ramaswamy); their stock price is up 57% in the last month; and the company is coming off its first truly encouraging quarterly earnings report in a year. Anyone who invested in TSLA a year ago, five years ago, or 13 years ago, when our Mike Cintolo first recommended the stock in his Cabot Top Ten Trader advisory, has made a LOT of money.

But did you know that Tesla is no longer the top seller of battery electric vehicles (BEVs) in the world? That distinction belongs to a Chinese EV maker, which surpassed Tesla in BEV sales volume in the fourth quarter of 2024 and just topped Tesla in revenue in the third quarter. In October, this company sold 502,657 EVs, up 66.5% from last October, and up 19.8% from September’s 419,166 units sold – the previous monthly record. The company is on track to blow past its goal of selling 3.6 million EVs this year.

And yet … the stock trades at less than 16x earnings estimates, or more than six times cheaper than TSLA’s forward P/E ratio of 101; 1.1x sales (TSLA trades at 12.2x sales) and 4.6x book value (TSLA trades at 15.6x book). This isn’t to disparage TSLA – 13 years and 18,000%+ gains later, it’s still in the portfolio of my Cabot Stock of the Week advisory. But clearly, its greatest growth period is behind it, and even by its own standards, its valuation is quite lofty on the heels of its post-election hot streak.

So today, let’s beef up our dwindled-down Cabot Value Investor portfolio by adding the company that’s growing sales 9x faster than Tesla and whose stock is more than 6x cheaper. Let’s add…

New Buy: BYD Inc. (BYDDY)

BYD isn’t a household name, at least not in the U.S. But it’s no spring chicken. Founded in 2003 by Wang Chuanfu, BYD (which stands for “Build Your Dreams”) 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. Last year, sales improved another 35%, to $85 billion. This year, it’s on track for $106.4 billion, or 25% growth, with another 20% growth expected in 2025.

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. So that covers Europe, Southeast Asia and South America. You’ll notice there are no plans to expand into the U.S. While BYD does have a minor presence here – it makes electric buses in California – it’s mostly staying out of America to avoid high tariffs and political conflict, two factors that will only ratchet up under a second Trump term.

So while many Chinese stocks are saddled with the baggage of ongoing U.S.-China turmoil, BYD isn’t. Even without the U.S. market, it’s already the biggest EV and hybrid manufacturer in the world. And that’s from selling nine out of every 10 cars in China alone.

The company long ago caught Warren Buffett’s attention. Berkshire Hathaway invested $230 million in BYD in 2008, when it was just a Chinese automaker with no real EV presence. Today, that investment has ballooned to $1.84 billion. Granted, Berkshire did trim its stake in BYD a couple times earlier this year, from over 7% to just under 5%. But Buffett and company have been paring back positions across the board this year, including with Capital One Financial (COF) – a stock that we recently retired from the Cabot Value Investor portfolio after it blew past our price target in less than four months. So, Berkshire’s reduced stake in BYD shouldn’t be a concern.

As for BYD stock, which trades as an American Depositary Receipt (ADR) under the ticker symbol BYDDY, it’s up a healthy 22% year to date but has pulled back lately as the Chinese stock rally has fizzled since a round of economic and market-related stimulus measures by the Chinese government and central bank sent Chinese stocks soaring in early October. BYDDY peaked at a closing high of 83 on October 7; it currently trades at 67. The company did nothing wrong – its third-quarter earnings were solid, if unspectacular, at 24% revenue growth and 11.5% EPS growth. And the current quarter is looking much better, with the aforementioned 19.8% month-to-month jump in October cars sold.

At 15.8x 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. With a potentially monster quarter in the works (analysts are projecting 45.6% revenue growth), I think a swift bounce-back is in order after a 19% dropoff in the share price over the last six weeks. Let’s add BYDDY to our Growth/Income portfolio (it actually pays a modest dividend, 1.3% yield) and set a price target of 90, which is 33% higher than the current price. Yes, that would blow past the previous high of 83, which the stock reached in October and also in mid-2022 before being almost slashed in half by year’s end. But to reach 90 a share, BYDDY would only be trading at just over 20x forward earnings – still less than a quarter of the five-year average valuation.

So, in reality, a 90 price target feels fairly conservative for a company that has emerged as a legitimate rival, at least on the global stage, to mighty Tesla. 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
New Buy – BYD Inc. (BYDDY), with a 90 price target

Last Week’s Portfolio Changes
CNH Industrial (CNH) – Moved from Buy to Sell

Upcoming Earnings Reports
November 26, 2024 – 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.

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 last year. This year, 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 just 12.8x 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 roughly 24% below their 2017 and 2021 highs, there’s plenty of room to run.

There was no company-specific news for The Cheesecake Factory this week, but shares tumbled 5%, likely in sympathy with the broad market. In reality, shares are right back to where they were two weeks ago. The last bit of 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%.

I’ve set a price target of 65, 40% higher than the current price. The 2.3% dividend yield helps matters. The holiday shopping season could be a boon for the share price. 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. This year, the top line is on track to top $13 billion for the first time. It should top $13.5 billion next year.

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 13.5x forward earnings estimates and at 1.24x 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 ahead of its Q3 earnings report next Tuesday, November 26. Expectations for the quarter are pretty muted: -0.5% sales growth, with a 5.3% year-over-year decline in EPS growth. But the company has beaten EPS estimates by double digits in each of the last four quarters, so perhaps another solid beat is in order.

DKS shares, which were down another 3% this past week and are bumping up against their November lows, could use a jolt, and next week’s earnings are the most obvious catalyst. The stock has 29% 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 10.7x estimates – and growing faster than the average bear. In fiscal 2024, analysts anticipate 19% EPS growth on 7.5% revenue growth, both of which would easily top 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 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.

There was no company-specific news for Toll Brothers this past week, and shares were largely unchanged, down about 1%. Stubbornly high mortgage rates (the 30-year fixed rate is still in the 6.7% range, where it’s been all month) have been an anvil weighing on the stock, especially after rates flirted with dipping below 6% in September on the heels of the Fed’s first rate cut. It will likely take at least a couple more cuts for rates to get back to that level. But eventually, they’ll get there – and likely below 6% for the first time since late 2022. It’s just that the Fed may take longer to slash rates than initially anticipated after coming in hot out of the gates with its 50-basis-point cut in September.

TOL shares have 19% upside to our 180 price target. We have a nice gain on the stock thus far. 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 0.56. The stock peaked at 96 a share in November 2018; it currently trades at 94.

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

As Spirit Airlines (SAVE) files for bankruptcy, the rich keep getting richer in the airline industry, and United is definitely among the rich. The company reported that bookings to Europe over the holidays are up 10% year over year and nearly 30% from pre-pandemic 2019. United is prepping for its busiest holiday season ever, with 60 nonstop flights a day from U.S. airports to European ones in November and December.

And the stock price just keeps rising, even in an off week for the market. UAL shares were up another 4.6% this week and are nearly all the way back to all-time highs above 96 a share, set in November 2018. We now have an 89% gain on the stock in less than seven months, and shares blew past our 70 price target last month. That prompted us to sell half the shares to book profit; we’re still holding the other half and will keep riding UAL’s sky-high momentum until it finally hits some turbulence. 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; this year, 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 10x earnings estimates and at just 1.33x sales. A solid dividend (3.1%) adds to the appeal of this mid-cap stock.

There’s been no news for ADT of late, and shares gave back the 2% they had gained the previous week, likely in sympathy with the market pullback.

Late last month, ADT reported earnings that beat on both the top and bottom lines, prompting a 7% boost in shares since. 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. But the stock remains cheap, trading at 10x forward earnings. The shares have 33% 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 and as well as ongoing pressure on the company to maintain shareholder-friendly actions.

Aviva had a nice bounce-back week, rising nearly 5% after dipping below 12. There was no news. This U.K.-based life insurance and investment management firm is growing well (+14% operating profits in the first half of the year) and remains undervalued at just 10.6x forward earnings estimates, 0.33x sales and a microscopic 0.06 Enterprise Value/Revenue ratio. It has 14% upside to our 14 price target. The 7% dividend yield adds to our total return thus far. 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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