PYPL - Market Sell-Off: 5 Stocks I Am Buying Now

2023-10-04 05:21:51 ET

Summary

• September historically experiences a stock market sell-off, driven by factors like seasonal portfolio rebalancing and investor psychology.
• Recent market decline presents buying opportunities, with stocks like Pfizer, Cisco Systems, PayPal, Expedia, and American Airlines trading at attractive valuations.
• Investors should carefully analyze the market landscape to find undervalued stocks that can provide returns in the face of economic turbulence.

Historically, September has often witnessed a stock market sell-off, earning a reputation as a challenging month for investors. This trend has puzzled analysts and traders for years, as it seems to defy conventional wisdom. While the reasons behind this phenomenon are multifaceted and not always consistent, some theories attribute it to factors like seasonal portfolio rebalancing, investor psychology, or even just coincidence.

In September of this year, the stock market experienced a significant drop, primarily driven by a confluence of factors. The plummet was sparked by soaring oil prices, raising concerns about escalating inflation rates. Additionally, strikes in various industries added to the economic uncertainty. Furthermore, the once-vibrant AI rally in the technology sector appeared to be losing steam, contributing to the overall market decline.

Nevertheless, valuations are beginning to look more attractive and offer a compelling entry point. In this regard, I am buying the following stocks:

1. Pfizer (NYSE: PFE )

Pfizer's stock has experienced a decline of approximately 25% over the past year due to a drop in sales. This decline can be attributed to the decrease in Covid-19 cases worldwide, leading to reduced demand for its vaccine, which had been a substantial part of its revenue. Despite this decrease in revenue, Pfizer maintains its position as the second-largest pharmaceutical company, with projected revenues of $70 billion for 2023. Notably, Pfizer recently completed a $43 billion acquisition of Seagen ( SGEN ) and anticipates that this acquisition will contribute over $10 billion in risk-adjusted revenues by 2030. Currently, Pfizer's stock is trading at a valuation of 2.7 times forward sales, a level not seen since 2012. Additionally, the company offers an attractive 5% dividend yield, a payout ratio last seen in 2010.

2. Cisco Systems (NASDAQ: CSCO )

During the month of September, Cisco's stock, like many others in the market, experienced a decline, partly influenced by its recent acquisition of Splunk ( SPLK ) for $28 billion in an all-cash transaction. This strategic move is anticipated to expedite Cisco's shift toward a recurring revenue model, a shift that is already bearing fruits. In its most recent earnings report, Cisco disclosed an impressive 16% increase in revenue and achieved record-high quarterly free cash flow of $6 billion. With minimal debt and robust operating margins, Cisco is well-positioned to enhance its stock buyback initiatives in the years to come.

3. PayPal (NASDAQ: PYPL )

The once high-flying $350 billion growth stock has deflated over 80% from its highs in July 2021, as revenue growth has decelerated and active user numbers are stalling. However, PayPal's total payment volume continues to grow steadily, while its operating margins remain strong. In this regard, PayPal's strong free cash flow and robust balance sheet will allow for further share buybacks, beyond its $5 billion in share buybacks in 2023. The stock is trading at a historical valuation of just 16x earnings, or 2.2 times sales. If PayPal reports positive earnings with regard to user numbers, similar to Meta last year, its stock could rise quickly.

4. Expedia (NASDAQ: EXPE )

In contrast to its primary rival, Booking Holdings (BKNG), Expedia's stock did not experience a comparable surge over the past year despite the resurgence in global travel. Nevertheless, Expedia's strong portfolio including Expedia.com, Hotels.com, Vrbo and others are driving impressive growth for the company. With nearly $2.5 billion in trailing 12-month EBITDA, Expedia trades at just 6x EBITDA and at 17x earnings. Its balance sheet remains healthy too, with over $8 billion in liquidity .

5. American Airlines (NASDAQ: AAL )

Despite air travel recovering swiftly from the pandemic, American Airlines stock is still down nearly 60% from levels before the pandemic. Since July, American Airlines dropped sharply as rising jet fuel prices, strikes and negations with pilots will have a notable impact on its operating margins. Here, American Airlines revised its adjusted operating margin guidance, now ranging from 4% to 5%, down from the previous outlook of 8% to 10%. However, I believe these are rather short-term impacts, while long-term air travel demand will stay high over the coming years. Moreover, American is working extensively in reducing its debt, while keeping a high degree of liquidity. At just 3 times earnings, I believe that American Airlines stock offers significant upside if current issues resolve.

The Bottom Line

The recent market sell-off has cast a spotlight on prevailing economic concerns. A continued sell-off in large-cap companies like Apple ( AAPL ) or Microsoft ( MSFT ) could place additional downward pressure on the broader market. However, despite these uncertainties, opportunities emerge as various stocks are now perceived to be attractively valued. Investors need to carefully scrutinize the market landscape, seeking potential gems that may weather the storm and provide returns in the face of the current economic turbulence.

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