2025 is approaching and investors need to start thinking about how they want to position their portfolios heading into the new year. Fund managers often make major changes before the new year, which can trigger a ‘Santa Claus rally’. This effect is driving stock prices higher in December, so individual investors should start considering their moves now.
Two stocks I’ll likely increase my position in before the new year Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) And PayPal (NASDAQ:PYPL). Both stocks could see some interest before the new year as they are relatively cheap compared to many stocks on the market.
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Alphabet is the parent company of Google and has a dominant hold on the search engine market. While there were some concerns earlier this year that Alphabet’s grip on this feature could be in jeopardy, it’s clear that these fears were overblown. Alphabet has proven that it is agile enough to implement changes (such as its generative AI-powered search summary) and will likely be able to copy successful features from competing search products before it encounters too many defectors.
Additionally, Alphabet is seeing huge demand in its Google Cloud division. This division, which is thriving as its customers increase their computing power to develop AI models, has many unique tools. The popularity and usage of Google Cloud has skyrocketed, driving revenue up 35% year over year to $11.4 billion.
Overall, Alphabet’s third-quarter revenue rose 15% year-over-year to $88.3 billion, which isn’t bad for the world’s fourth-largest company. Yet it is valued at an incredibly low price, with Alphabet’s stock returning around 22 times forward earnings. Considering the S&P500 (SNPINDEX: ^GSPC) is trading at 24.6 times forward earnings, Alphabet could see a rally next year as investors look for cheaper stocks with strong growth potential in the market.
PayPal hasn’t received much love from the market in about three years. The stock price peaked at over $300 per share in mid-2021 and declined pretty much until mid-2024. There has been some interest in it lately, with the stock up 50% since early July, but there is still plenty of room to go .
PayPal CEO Alex Chriss joined the company in September 2023 and is leading a transformation. He laid out his vision to make the company more efficient and focus on what PayPal does best, rather than becoming an app that is used for everything. This has worked out well in recent quarters, as PayPal’s business shows signs of life.
PayPal’s active accounts rose slightly in the third quarter, marking its first growth since the first quarter of 2023. Its transaction margin also rose – something it hasn’t done in a few years. These small improvements resulted in PayPal’s revenue increasing 6% year over year, which isn’t that impressive. However, investors should focus on the profits with PayPal because it is no longer a growth story. Operating income rose 19% to $1.4 billion, which is excellent.
With its cash flows, PayPal is buying back a ton of stock in the third quarter alone and has retired 28 million shares. With approximately 1 billion shares outstanding, this means that PayPal retired almost 3% of its shares in one quarter. Most companies would be happy if they could do that within a year, but PayPal does it much faster. This happens for two reasons.
First, PayPal’s management spends all its cash flows on stock buybacks. The country can afford to do this because its balance sheet is in a healthy place. Second, it’s a good idea because the shares are cheap. At the start of the third quarter, PayPal’s stock traded at about twelve times forward earnings and fourteen times trailing earnings.
PayPal’s stock isn’t as cheap after the rally, so the buybacks will be less effective, but there’s still plenty of room to run as it’s still well below the S&P 500’s price tag.
I wouldn’t be surprised if PayPal’s rally continues through the end of the year, making it a great stock to buy now.
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*Stock Advisor returns November 11, 2024
Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Alphabet and PayPal. The Motley Fool holds positions in and recommends Alphabet and PayPal. The Motley Fool recommends the following options: long January 2027 $42.50 calls on PayPal and short December 2024 $70 calls on PayPal. The Motley Fool has a disclosure policy.
2 Stocks That Could Crush the Market in 2025 was originally published by The Motley Fool
