2 underperforming stocks that could be great buys on the decline

The stock market has been on fire this year, but much of that performance can be attributed to a small number of tech giants that hold a disproportionate share of S&P 500 and benefit from the artificial intelligence (AI) boom. Many other stocks have done well, but it’s not that hard to find those moving in the opposite direction.

The pharmaceutical giant Pfizer (PFE 1.12%) and the social media platform Snap (SNAP 1.29%) belong to this group: both remained significantly behind January’s broader actions. Still, Pfizer and Snap could be good picks for long-term investors, especially when they’re down.

1. Pfizer

Pfizer can’t catch a break. The drugmaker is still struggling as its revenue and earnings fell off a cliff once its coronavirus drug and vaccine stopped generating hearty sales. Elsewhere, the company recently reported that one of its promising candidates, a combination coronavirus/flu vaccine, had mixed results in a pivotal clinical trial. Pfizer has had other setbacks recently, including in the promising area of ​​weight loss.

However, there were plenty of positives for Pfizer as well. In the second quarter, it reported its first year-over-year revenue increase in some time. Pfizer’s top line was $13.3 billion, up 2 percent from the year-ago period. That might not seem like much, but it’s a step in the right direction that isn’t entirely due to its December acquisition of cancer specialist Seagen for $43 billion.

What’s more, despite recent clinical setbacks, Pfizer has had a slew of brand new approvals, including seven in 2023, more than twice as many as any of its peers. Many of these products are still in the early stages of their contributions to Pfizer’s top line. And in the meantime, its reliance on its COVID-19 products will decrease. Pfizer will also gain a lot of other brand new products. It recently advanced once-daily danuglipron in weight loss to pivotal clinical trials.

The company discontinued the twice-daily version of this drug because of severe side effects. Management has promised to continue to pursue breakthroughs in this area. In oncology, Pfizer inherited the very long pipeline that Seagen boasted. Except that Pfizer has far more resources than its new subsidiary ever had, which could help speed development of new blockbusters. Pfizer should succeed in rejuvenating its lineup, and the process is already underway.

Plus, the stock, which is up just 2% year-to-date, is a decent pick for income investors. Pfizer’s forward yield exceeds 5.88% — much higher than that S&P 500his average of 1.33%. Pfizer has increased its payout by 62% over the past decade. It might take some time to fully recover, but the company can still offer solid long-term returns, especially for those who opt for automatic dividend reinvestment.

2. Snap

Snap stock is down about 50% this year and isn’t too far off its 52-week low. Investors may believe that the company’s financial results are terrible, its prospects are poor, and there is no hope for a turnaround. But that is not the case. Snap has improved on several fronts. During the second quarter, the company’s revenue rose 16% year over year to $1.2 billion. While Snap’s top-line growth isn’t as impressive as it was three years ago, it has partially rebounded over the past year.

SNAP Revenue (Trimely YoY Growth) data by YCharts

True, the company remains unprofitable based on generally accepted accounting principles (GAAP). Net loss per share in the second quarter was $0.15, better than the loss of $0.24 per share reported in the year-ago period. However, Snap’s biggest asset — its user base — is still growing. It ended the period with 432 million daily active users, up 9% year-over-year. It had 850 monthly active users (MAU). It could reach the incredible milestone of 1 billion MAU in the next two years. With this vast ecosystem, businesses will continue to look to Snap’s platform to deliver targeted ads.

Snap has arguably created a network effect, the more users on its platform, the more valuable it is to other users on the outside looking in and to advertisers. Snap has also been looking to diversify its revenue stream, a plan that is slowly taking shape. The company’s initiatives include a subscription plan called Snapchat+ and investments in generative AI and augmented reality. Provided these initiatives pay off and Snap continues to expand its user base, the company could eventually become profitable and deliver much better returns than it has in recent years.

Snap may be a little risky, but at less than $10 a share, it’s worth considering.