The Federal Reserve started taking actions this month that are likely to lead to lower interest rates. It just announced a 50-basis-point reduction to the federal funds rate, and there could be more cuts coming before the end of the year, especially if the U.S. economy shows further signs of slowing.
For investors, a rate-cutting environment could be an opportune time to buy stocks that could benefit from reduced rates. Three companies that could see significant upsides from falling interest rates are Pfizer (NYSE: PFE), Carnival (NYSE: CCL), and Verizon Communications (NYSE: VZ).
Here's why I think these three companies with cheap valuations could be excellent stocks to add to your portfolio today.
1. Pfizer
Pfizer has failed to attract much interest from investors so far in 2024. Its shares are up by a relatively modest 1.7% thus far, while the S&P 500 has rallied by nearly 20% year to date. The healthcare stock is trading at an incredibly low forward price-to-earnings (P/E) multiple of less than 11, based on analysts' consensus estimates. It's also trading at approximately 2 times its book value.
There's extremely good value here for investors because Pfizer's very stable dividend yields 5.7% at the current share price. And the pharmaceutical giant's stock may take off in part because, in a declining interest rate environment, high-yielding stocks become more desirable, as investors' ability to earn similar returns from lower-risk assets like bonds wanes.
Pfizer's business is proving to be resilient. The company recently boosted its guidance following stronger-than-anticipated second-quarter results. For the period, revenue rose by 2% year over year to $13.3 billion while adjusted income declined by 11% to $3.4 billion -- which isn't bad given the big declines in demand for its COVID-19 vaccine and its antiviral this year. The company is now guiding for adjusted diluted earnings per share of $2.45 to $2.65 this year versus its previous forecast range of $2.15 to $2.35.
A strong yield and a robust and diversified healthcare business make Pfizer an underrated and undervalued stock to own right now. It could be overdue for a considerable rally.
2. Carnival
Cruise line operator Carnival has been generating some terrific results in recent quarters as demand for cruises remains incredibly strong.
In its fiscal second quarter, which ended May 31, Carnival posted $5.8 billion in sales -- up nearly 18% year over year. More importantly, the business is now back to being profitable on a consistent basis: It recorded a $92 million profit for the quarter compared with a loss of $407 million in the prior-year period. Results should get even better if Carnival can reduce its interest expenses, which totaled $450 million during the period. While the company has a lot of debt -- much of which it took on to stay solvent during the pandemic -- if it's able to refinance some of that at lower rates, its interest expenses could come down drastically.
That would also make the stock appear less risky to investors. As of 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 have risen by just 2% this year, and it trades at a forward P/E ratio of just under 12. As such, it's another cheap stock investors can add to their portfolios right now.
3. Verizon Communications
Verizon stock is up by around 18% year to date, a gain that only marginally lags the S&P 500. But despite its relatively good results thus far, I still see a lot more upside for the stock. A big reason why is that it's yielding a fairly high 6.1%. Historically, Verizon's dividend yield has been around 4%. The stock's modest valuation is also evident in its forward P/E multiple of 9.
There are multiple reasons Verizon could benefit from lower interest rates. The first is that lower interest rates will make the stock's high yield more attractive. Secondly, lower rates may help improve consumer purchasing power, leading to more phone upgrades, and potentially more travel and roaming-related spending.
Verizon's business has been growing by modest single-digit percentages, and this year, management projects wireless service revenue will grow between 2% and 3.5%. That could improve if more consumers start upgrading their phones, which could happen as smartphones with new artificial intelligence features arrive.
Verizon could be a good stock to buy and hold, as better days could be ahead for it as interest rates come down.
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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