Buy These 3 Fiscal Cliff Fixing Stocks
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Warren Buffett once said “a public opinion poll is no substitute for thought.” In other words, people should value their own ability to make sense of the issues that concerns them the most. Over past three months, no other issue was more polarizing on the market than the fiscal cliff.
Everybody had an opinion and stocks got hammered because of it. Good or bad fundamentals didn’t matter. But now it’s time to take advantage of the optimist’s side. That the issue has been resolved and as a result here are some stocks that are poised to rebound.
Pandora (NYSE: P) – Target $12
We can’t talk about a fiscal cliff rebound without leading off with Pandora. After all, the stock took a merciless beating – losing 20% as Pandora’s CEO, Joe Kennedy uttered those two words (fiscal cliff) while issuing fourth quarter guidance. It didn’t matter that Pandora had just released a stellar Q3, during which profits tripled to $2 million with revenues soaring 60% to $120 million.
Despite all of that, it was all about the next quarter. In guiding much lower than analyst expected, Pandora essentially said it will go from beating the street’s profit estimates by 4 cents per share in one quarter and then the very next quarter it expects to report a loss as high as 9 cents while analysts were expecting a 1 cent profit.
It didn’t make sense for the company to go from one quarter of +4 cents in profits to -8 in terms of estimates – at least not without some type of catastrophic event. However, as I pointed out the main threat and the real cause of Pandora’s gloomy outlook was Apple (NASDAQ: AAPL) and the rumors that the company is planning to launch a competing music streaming site.
This rumor caused advertisers to postpone long term commitments made to Pandora without knowing what Apple would have to offer. This made perfect sense. After all, with Apple’s popularity, it stands to reason that companies are more likely to get a better bang for their advertising dollars. This also places advertisers in a much better negotiating position with Pandora.
With a fiscal cliff resolution, this puts Pandora now in play – assuming that management was telling the truth. With the stock trading at $9, I think Pandora’s growing fundamentals makes it a worthwhile bet here. With revenues in the 60% range and a possibility of a buyout looming from Google or Facebook, I expect the stock to reach $12 by the summer.
Facebook (NASDAQ: FB) – Target $33
I have always liked Facebook. But I never cared for its arrival on Wall Street. The company certainly didn’t make a whole lot of friends in 2012 – losing roughly 60% from its all-time high until finally closing the year at $26.62. Facebook today seems light-years ahead of where it was during its IPO. As evident by its Q3 performance, the company has quickly moved from hype to hyper growth. And a fiscal cliff resolution will only push it higher.
In the most recent quarter, the company produced $1.09 billion in advertising revenue. But the impressive aspect of this was that 14% of that total (or $152.6 million) was generated from mobile. This was certainly an encouraging sign for investors since Facebook’s biggest form of criticism has been its inability to monetize mobile traffic. During the quarter, it answered the call.
Also, Facebook reported 12 cents per share on revenues of $1.26 billion – exceeding consensus estimates of $1.22 billion and 11 cents per share. The company’s better than expected performance was helped by significant improvements in various segments of its business, many of which continue to grow by double-digit averages, including payment revenue, which soared 13% to $176 million.
The company is now operating on all cylinders and giving Google a run for its money in terms of ad revenue – growing sequentially by 7%. However, Facebook is not out of the woods yet. But from here, the best is yet to come. What’s more, with a more “ad friendly” climate due to the fixing of the fiscal cliff, this should lift any concerns regarding ad spending. On the basis of mobile growth, the stock is attractive at $26 and I will maintain my $40 target over the next 12 months.
Groupon (NASDAQ: GRPN) – Target $8
I’ve always been intrigued by Groupon, but the company’s fundamentals have always kept me at bay. However, while the company works to get its house in order this year, there are other reasons to consider placing a bet here. Not the least of which is that there is now very limited downside risk.
Thanks (in part) to the fiscal cliff fix. But more importantly, Tiger Global’s recent 9.9% stake should remove all doubt as to where the platform is. Nonetheless, organic growth is still the challenge. Groupon still must nevertheless prove how it will ever earn a profit. With little to no competitive leverage this is going to be tough.
The company is expecting a slight uptick in performance for the fourth quarter – forecasting revenue in the range of $625 to $675 million. Plus, management assured investors of better international performance and said that it is working to improve (among other things) mobile support, personalization as well as improvements in its deals mix. But will it be enough?
The good news is the company has just been given more life. And soon there might be a chance that Groupon would become an acquisition target. Two years ago, Google (NASDAQ: GOOG) offered $6 billion for Groupon. It didn’t work out. However, according to a recent Bloomberg report, Google might be reconsidering another bid. On the rumor alone, shares of Groupon soared 23% several weeks ago.
In other words, poor fundamentals or not, there is now money to be made on the stock. And if the shares only reach the price of $10.51, which is the midpoint of its 52-week high, Groupon investors would do very well. However, for now I'm maintaining my near term target of $8.
rsaintvilus is long AAPL and has no positions in the other stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!