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3 Stocks That Can Benefit from a Santa Claus Rally

Motley Fool - Sun Nov 12, 2023

Almost like clockwork, Halloween ended, stores started setting up for the all-important holiday shopping season, and the stock market started what could potentially end up as one heck of an early Santa Claus rally. Of course, as kind as Santa Claus may be, the market is rarely as forgiving over time. As a result, investors would do well to look for stocks that could continue to benefit even after the gift giving season ends.

With that in mind, three Motley Fool contributors went looking for companies whose shares look a bit beaten down, but whose underlying businesses look like they have solid prospects. The expectation is that those are the types of companies that just might benefit from a Santa Claus rally and stay strong even after Santa leaves town. They picked Prudential Financial (NYSE: PRU), Pfizer (NYSE: PFE), and Enphase Energy (NASDAQ: ENPH). Read on to find out why, then decide for yourself whether any of them might be a great pick for your holiday stock shopping list.

Santa Claus checking his list.

Image source: Getty Images

Being rock solid might once again be a good thing

Chuck Saletta(Prudential Financial): So well-known for its focus on being rock-solid financially speaking, Prudential Financial uses an actual rock -- the rock of Gibraltar -- as its corporate logo. In normal times, that serves an insurance company like Prudential Financial incredibly well.

Yet right now is hardly a normal time. To attempt to quench inflation, the Federal Reserve has raised interest rates faster than it has in about 40 years.When interest rates rise, the prices of existing bonds fall. That hits conservatively managed companies like Prudential Financial, hard. The company's balance sheet assets include over $300 billion in bonds.

Still, a somewhat unlikely Santa Claus, in the form of Federal Reserve Chairman Jerome Powell, may be set to spark a recovery for Prudential Financial. As the Federal Reserve pauses on its rate increases and the market expects largely flat rates for the next few Fed meetings, those bond prices should stabilize, as long as the issuers remain solvent.

Even better, as Prudential Financial's existing bonds mature and the company buys replacement ones, those replacements will be bought reflecting current interest rates at the time of purchase. If rates remain high, that translates directly to stronger earnings from Prudential Financial's bond portfolio. After a couple of fairly painful years in the market for its investors, steady rates from the Federal Reserve just might be the gift that sparks a Santa Claus rally for Prudential Financial.

COVID-19 may be under control, but that doesn't mean the end of the pharma business

Eric Volkman (Pfizer): Storied pharmaceutical company Pfizer is a model example of a coronavirus pandemic-era superstar whose glow has faded. It was famously a co-developer of Comirnaty, the go-to COVID vaccine that found its way into millions of arms throughout the world.

Now that the coronavirus looks increasingly like yesterday's health emergency, the investing world is moving on from Pfizer. The share price has crumbled since its late 2021/early 2022 peak, shortly after the vaccine won its initial authorization U.S. Food and Drug Administration. So far year to date, it's down 39%, comparing very unfavorably to the S&P 500 index's 14% increase.

One recent factor in this is Pfizer's third quarter, which featured an uncharacteristic (and deep) net loss. Like many misfortunes so far this decade, we can blame much of that on the pandemic -- the disease's rapid decline forced a nearly $5 billion inventory writedown for the quarter on Paxlovid, the company's Covid drug. Compounding that, in the near future several of its blockbuster drugs will tumble off the patent cliff.

Yet Pfizer still remains a powerhouse in its industry, with a fat pipeline that has been producing new products at record rates lately. Management said that these goods alone should produce up to $20 billion in revenue by 2030, contributing to a total top line of as much as $84 million that year. No, that isn't the $100 billion-plus the company earned in 2022, but that was the year Comirnaty was on the front lines of the COVID battle.

Meanwhile, strong cash flow from a wide range of commercialized products provides a solid financial base for Pfizer's chunky dividend. Thanks to that share price decline, the company's payout currently yields in excess of 5%. That qualifies it as a high-yield dividend by any measure, particularly by the standards of the rarely generous healthcare sector.

Santa ain't bringing solar panels, but a little optimism, please?

Jason Hall(Enphase): It's been a devastatingly brutal 2023 for solar panel electronics and energy storage systems maker Enphase Energy. Shares are down more than 70% so far this year. And not for no reason: The solar industry is going through a brutal downturn, and it's hitting the residential solar market that makes up the bulk of Enphase's business particularly hard. Revenue and earnings per share fell 23% and 27%, respectively, in the third quarter, but that's only part of why the stock is down.

The reality is, the market is looking forward. And it does not like what it sees at all. Management expects sales of $300 million to $325 million in the fourth quarter; that means revenue could fall by more than 55% next quarter, at the midpoint of guidance. So Mr. Market sees the downturn in the solar cycle accelerating, and a long road back to sales growth ahead for Enphase. There's little doubt that shareholders would love a Santa Claus rally here.

And I think there's reason for optimism (and maybe even a little greed) at this point. Enphase has a remarkably strong balance sheet with over $500 million in net cash. It's also still generating positive free cash flow -- $122 million last quarter. Add it all up, and this dominant, profitable business is poised to surge ahead when the solar cycle invariably returns to growth. In the meantime, maybe the Big Guy could put a higher stock price in our stockings? Please?

May this season be the start of a great investing future

Whether or not the market continues its recent rebound through the end of the calendar year, when all is said and done, a share of stock represents nothing more than an ownership stake in a business. That business's prospects and results will determine any long-term successes its investors see.

If the prospects of a Santa Claus rally is what gets you looking for potential bargain stocks worth buying, just be sure to focus on the company's operating performance, not just its stock's movements. Find the right investment, and you just might find that it could turn into a gift that keeps on giving.

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Chuck Saletta has positions in Pfizer and Prudential Financial and has the following options: long January 2024 $110 calls on Prudential Financial, short January 2024 $115 calls on Prudential Financial, short January 2026 $82.50 puts on Prudential Financial, and short January 2026 $95 puts on Prudential Financial. Eric Volkman has no position in any of the stocks mentioned. Jason Hall has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Enphase Energy and Pfizer. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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