The Federal Reserve began taking steps this month that will likely lead to lower interest rates. They just announced a 50 basis point cut in the federal funds rate, and more cuts could follow before the end of the year, especially if the U.S. economy shows further signs of slowing.
For investors, a falling interest rate environment can be a favorable time to buy stocks that can benefit from lower rates. Three companies that could see significant benefits from falling interest rates are: Pfizer (NYSE: PFE), Carnival (NYSE: CCL)And Verizon Communications (NYSE: VZ).
That’s why I think these three companies with low valuations are excellent stocks to add to your portfolio today.
1.Pfizer
Pfizer has failed to generate much investor interest so far in 2024. Shares are up a relatively modest 1.7% year to date, while the S&P 500 is up nearly 20% so far this year. The healthcare stock is trading at an incredibly low forward price-to-earnings (P/E) ratio of less than 11, based on analyst consensus estimates. It is also trading at about 2 times book value.
There’s extremely good value here for investors, as Pfizer’s very stable dividend yield is 5.7% at the current share price. And the pharmaceutical giant’s shares may rise in part because, in a falling interest rate environment, high-yielding stocks become more attractive as investors’ ability to earn similar returns from lower-risk assets like bonds declines.
Pfizer’s business has proven resilient. The company recently raised its guidance after stronger-than-expected second-quarter results. For the period, revenue rose 2% year-over-year to $13.3 billion, while adjusted income fell 11% to $3.4 billion, not bad considering the big drops in demand for its COVID-19 vaccine and antiviral this year. The company now forecasts adjusted diluted earnings per share of $2.45 to $2.65 this year, compared with its previous forecast range of $2.15 to $2.35.
Strong returns and a robust and diversified healthcare business make Pfizer an undervalued and undervalued stock to own now. It may be too late for a significant rally.
2. Carnival
Cruise line Carnival has posted stellar results in recent quarters as demand for cruises remains extremely high.
In its fiscal second quarter, which ended May 31, Carnival posted $5.8 billion in revenue, up nearly 18% year over year. More importantly, the company has returned to consistent profitability, posting a profit of $92 million for the quarter, compared to a loss of $407 million in the same period last year. Results should improve even more if Carnival can reduce its interest expenses, which totaled $450 million in the period. While the company has a lot of debt, much of it incurred to stay solvent during the pandemic, its interest expenses could drop dramatically if it can refinance some of it at lower rates.
That would also make the stock less risky for investors. At the end of May, Carnival had $27.2 billion in long-term debt on its books, down from $28.5 billion six months earlier.
Shares of Carnival are up just 2% this year and it trades on a forward P/E ratio of just under 12, making it a cheap stock for investors to add to their portfolios now.
3. Verizon Communications
Verizon stock is increased by approximately 18% year-to-date gains that only marginally lag the S&P 500. But despite the relatively good results so far, I see a lot more upside for the stock. A big reason for that is that it has a fairly high yield of 6.1%. Historically, Verizon’s dividend yield has been around 4%. The stock’s modest valuation is also clearly visible in its forward price/earnings ratio of 9.
There are several reasons why Verizon could benefit from lower interest rates. First, lower interest rates make the stock’s high yield more attractive. Second, lower rates can help improve consumers’ purchasing power, leading to more phone upgrades and potentially more spending on travel and roaming.
Verizon’s business has been growing by modest single-digit percentages, and this year management predicts wireless revenue will grow 2% to 3.5%. That could improve as more consumers upgrade their phones, which could happen as smartphones arrive with new artificial intelligence features.
Verizon could be a good stock to buy and hold as better times may be ahead as interest rates fall.
Should You Invest $1,000 in Pfizer Now?
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool recommends Carnival Corp. and Verizon Communications. The Motley Fool has a disclosure policy.
3 Ultra-Cheap Stocks That Could Get a Boost from Fed Rate Cuts was originally published by The Motley Fool
