After several years of keeping interest rates high to control inflation, Federal Reserve Finally on Wednesday I changed the lever.
The central bank surprised some investors by opting for a 50 basis point cut, lowering the federal funds rate Between 4.75% and 5%. The measure should give a positive boost to the economy, although the main stock indices lost their initial gains at the end of the day's session.
Still, lower interest rates are clearly a boon for several stocks. Let's take a look at three that are poised to benefit from lower interest rates.
1. Home Depot
Arguably the biggest impact of interest rate cuts is that they will lower mortgage rates and borrowing costs for homeowners. That means it will likely give a much-needed boost to the ailing housing market and, as rates fall, encourage refinancing and borrowing through loans and home equity lines of credit (HELOCs).
In fact, there is already some evidence that demand for home equity lines of credit (HELOCs), which are typically variable-rate loans, is increasing in anticipation of falling interest rates. In addition, homeowners now have more equity available due to the lock-in effect of high mortgage interest rates in recent years.
All this is good news for House deposit (NYSE: HD)The nation's largest home improvement retailer, Home Depot has struggled in recent years after a pandemic boom in home improvement spending gave way to a slump as mortgage rates soared.
Business is cyclical, and lower rates should boost home improvement spending. Home Depot also has even more firepower after its acquisition of SRS Distribution earlier this year, which significantly increased its exposure to the building materials distribution sector, serving professional contractors and tradespeople.
Home Depot's business is still struggling, with comparable sales down 3.3% in the second quarter, but with rates expected to continue to decline, don't be surprised if the company's business and its stock soar in the peak home improvement season next spring.
2. Carnival Corporation.
Carnival Corporation. (NYSE: CCL)the world's largest cruise operator, is a good example of a stock that is well positioned to take advantage of lower interest rates.
Carnival should benefit in two ways. First, lower rates will reduce interest payments on its large debt balance and possibly give the company the opportunity to refinance its fixed-rate debt.
The company had to borrow heavily to survive the pandemic and ended the second quarter with $29.3 billion in debt, costing it $450 million in interest expenses in the quarter, or $1.8 billion annualized. That equates to an average interest rate of 6.1%, and its interest expenses ate up nearly all of the company’s $560 million in operating income in the quarter.
Even if Carnival were to lower its average interest rate by 1 percentage point, it would save $180 million a year in interest expenses.
The other reason Carnival should benefit from lower interest rates is that they should boost the economy and consumer spending by helping the job market, making it easier for businesses to borrow and reducing costs for consumers, giving them more money to spend on discretionary activities like travel.
Like Home Depot, Carnival operates in a cyclical industry, meaning the business tends to perform better in a healthy, expanding economy.
3. Upstart
Finally, Upstart (NASDAQ: UPST) Upstart is another solid candidate to benefit from lower interest rates. As a consumer lending platform, Upstart has more exposure to interest rates than almost any other stock, and its volatile track record shows this.
The stock rallied again in 2021 as the company's revenue rose by triple digits and it posted solid profit margins. That surge, however, was fueled by stimulus money and the pandemic economy, and came to a halt when interest rates rose and lending standards tightened.
Now that interest rates are falling, that correction should boost demand for Upstart loans and relax lending standards.
Meanwhile, business also appears to have picked up. Its most recent loans are expected to generate a gross yield of 14%. Its Upstart Macro Index is falling, meaning the macroeconomy is less likely to trigger a default. Ninety-one percent of its loans are instantly approved and fully automated, and it has expanded its HELOC product to 30 states and the District of Columbia.
Management did not factor rate cuts into its guidance, but chief financial officer Sanjay Datta said: “Rate cuts are unequivocally good for business,” adding that high rates had been “the single biggest drag on our business.”
It’s unclear what the exact impact of lower rates will be, but Datta predicted that conversion rates, or the percentage of successful loan applications on the company’s platform, would rise with each Fed cut. It could take a couple of quarters for that to be reflected in the numbers, but Upstart’s stock could soar if it starts to show glimpses of the company it was in 2021.
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Jeremy Bowman has positions in Upstart. The Motley Fool has positions in and recommends Home Depot and Upstart. The Motley Fool recommends Carnival Corp. The Motley Fool has a Disclosure Policy.
Interest rates are falling. The 3 best stocks to buy right now. Originally published by The Motley Fool
