7 Stocks to Load up on Before Rate Cuts Send Them Soaring

Stocks to buy

The Federal Reserve has signaled that it could implement up to three rate cuts this year, and the first one may come sooner than you think – possibly before the election in an attempt to give the economy a boost. In fact, if the government decides it needs to cut rates aggressively, we could even see all three cuts happen before the election. Historically, we’ve seen interest rates drop much faster than they rise, often due to unexpected “black swan” events that send markets downward. Regardless of how quickly it happens, it seems clear that rates are likely headed lower in the near future.

It pays to identify stocks that stand to benefit most from rate cuts over the long run – stocks that could potentially deliver outstanding returns. I’ve got my eye on seven stocks in particular that I believe are primed for a rally if rates fall as expected. Let’s take a look!

Carnival (CCL)

Source: JHVEPhoto / Shutterstock.com

Carnival (NYSE:CCL) is a cruise company that had been suffering from malaise even before the pandemic struck. The pandemic was almost the nail in the coffin for the business, but ultra-low interest rates have kept it afloat and allowed it to weather the storm. Sadly, even with the travel boom following the pandemic, rising rates have been chipping away at all of Carnival’s profits. That’s why the stock still sits almost 70% off its February 2020 price.

However, that could change soon once rates are cut. Carnival has solid top and bottom-line growth potential here. Analysts estimate the company’s earnings per share could skyrocket from just 98 cents currently to a whopping $5.30 over the next decade – that’s around 20% average annual growth from today’s depressed levels. The top line is also expected to grow from $24.5 billion to $35.4 billion in that same timeframe.

You’re paying just 16 times forward earnings for that sort of explosive growth profile. And that’s not even factoring in the likelihood that lower rates will probably help this heavily indebted company beat those expectations. A rate cut could be the catalyst that finally gets Carnival’s stock rebounding in a big way after years of underperformance. I see significant upside potential here if rates start to fall.

American Airlines (AAL)

Source: GagliardiPhotography / Shutterstock.com

American Airlines (NASDAQ:AAL) has faced basically an identical story, despite operating in a completely different airline business. However, both these travel/leisure companies have been sharing the same powerful tailwinds and harsh headwinds. Passenger traffic has surged strongly along with the pandemic recovery. But we’re seeing a lot of those profits being sucked dry due to high-interest expenses on debt.

American has been paying around $500 million per quarter on average in interest expenses since Q2 2021. Yet even with that weighing it down, the company still managed to deliver a modest $19 million profit for Q4 2023. I believe AAL stock could really take off once rates start coming down.

After all, you’re paying less than 6 times forward earnings for the shares right now. Analysts expect EPS to more than double over the next four years, along with mid-single-digit revenue growth. Those estimates could prove conservative if borrowing costs decline.

American is cleaning up its balance sheet and is well-positioned for an era of cheaper financing costs. With the pandemic disruption largely in the rearview mirror, this could be an opportune time to load up on AAL before rate cuts catalyze the next big upswing for the stock. It’s a high-risk, high-reward play, but one I’m willing to make a bet on at today’s bargain valuations.

AT&T (T)

Source: Jonathan Weiss / Shutterstock.com

The top two telecom stocks, Verizon (NYSE:VZ) and AT&T (NYSE:T) have been extremely frustrating investments for shareholders. Both started sliding well before the pandemic, and the pandemic only exacerbated their declines. However, this downtrend seems to have stabilized in the near term with both stocks edging upwards over recent months. I believe AT&T, in particular, has a lot more room for recovery going forward.

Sure, the company has a hefty $161 billion debt load weighing it down. But AT&T is still managing to keep profits in the green while also yielding a hefty 6.3% dividend to investors at the same time. I think rate cuts would supercharge those profits, along with the subsidies that are already rolling into companies developing 5G and other communications infrastructure.

Analysts don’t expect flashy growth here, but the high dividends make it worthwhile to hold and reinvest in the stock until a sustained recovery rally takes hold. And there’s a decent chance that the rally could be catalyzed by lower interest rates.

Let’s face it – AT&T’s balance sheet is bloated, but the core business is still churning out cash flow. A decline in borrowing costs would provide immediate earnings accretion by reducing interest expenses. It would also increase the company’s financial flexibility to pay down debt more quickly.

I’m not calling for AT&T to be the next big multi-bagger. But for income investors, it could be an appealing way to collect juicy dividends while waiting for the next upswing, which could arrive courtesy of the Fed cutting rates. That upside potential, combined with the income stream, makes T shares worth a look at current levels.

Newell Brands (NWL)

Source: Casimiro PT / Shutterstock.com

Newell Brands (NASDAQ:NWL) is another beaten-down stock that’s trading at bargain-basement prices and is likely about to make a U-turn from here. This is another company that’s been adversely impacted by rate hikes and supply chain problems. It sells a range of consumer products, but I wouldn’t consider most of its offerings as essential purchases for customers. As a result, rate hikes have really stung this discretionary company, and the stock chart does not look pretty.

Regardless, it looks like an excellent opportunity if you’re a bargain hunter looking for rebound plays. Newell makes enough money to tread water for years with huge room for upside once rates are cut. The stock is currently trading below its Great Recession lows despite the fact that the company has actually been buying back shares and now yields 3.7% on the dividend.

Gurufocus puts the fair value of NWL stock at around $15 per share based on its model – nearly double the current $7.7 share price.

I see this as a classic “everything that can go wrong, has gone wrong” situation where the bad news is more than priced in. As the economy rebounds and rates start falling, Newell could deliver significant upside from today’s fire-sale prices. It’s a contrarian value play, but one I’m willing to make given the potential rewards if I’m right.

Tesla (TSLA)

Source: Rokas Tenys / Shutterstock.com

Tesla (NASDAQ:TSLA) has also been among the hardest-hit companies due to rising interest rates. However, unlike most stocks on this list, Tesla wasn’t adversely impacted because of high debt levels. Tesla’s vehicles are very expensive purchases, and most buyers finance them with loans and mortgages. Higher interest rates have discouraged people from making big-ticket purchases that require paying lenders hefty sums in interest over time.

As a result, demand for Teslas has cratered significantly amid the rate hike cycle. Not only that, but we’re also seeing softer demand as oil prices have come down from their crazy 2022 highs, reducing the incentive to buy an electric vehicle in the first place.

I still think Tesla is a buy at this level and can deliver stellar long-term returns from here. Future rate cuts could re-ignite demand for its vehicles considerably. The stock has priced in a lot of volatility, risk, and recent earnings misses already. Expectations are low now, and I believe Tesla will likely exceed them over the coming years despite near-term risks.

Let’s not forget – Tesla is still the only viable, mass-market electric vehicle company in the Western hemisphere. Every other EV startup has been an unprofitable cash pit so far.

3M (MMM)

Source: JPstock / Shutterstock.com

3M (NYSE:MMM) has been another big loser even in this bull market. However, I believe the stock has declined too much to a very strong historical support level of around $90 per share. The stock is now even cheaper than it was during the 2007!

Of course, 3M has been mired in controversy over litigation risks, and the general Wall Street outlook has been bearish for many months. However, the tide may be shifting. Most of the bad news already seems priced into the stock at this point.

Moreover, 3M just delivered blowout Q4 results with revenue surprising estimates by 3.7% and earnings per share beating expectations by 4.6%. This is usually a sign that Wall Street has gone overboard with its pessimism and that company execution is better than expected.

I believe buying at these bargain-basement levels is a good idea, and analyst sentiment is shifting fast. 3M does have a sizable $17 billion debt load, but it’s small enough to handle. The company also pays a juicy 6.5% dividend yield and still delivered $945 million in net income last quarter.

With the stock trading at just 11x forward earnings, holding shares until a recovery takes hold seems like a worthwhile endeavor – especially if rate cuts provide an added tailwind. 3M has been around for over 122 years and has weathered many storms before. I’m betting the company’s best days still lie ahead once the current headwinds subside.

LendingTree (TREE)

Source: shutterstock.com/CC7

LendingTree (NASDAQ:TREE) is a more under-the-radar stock that many investors may have overlooked. While many of the other names on this list are multi-billion-dollar behemoths, this online lending marketplace has a market cap of just $540 million as I write.

The stock has already recovered nearly 300% off its lows, and I believe the sharp uptrend could continue going forward. As I’ve said, borrowing and lending activity will likely pick up strongly after interest rates are cut. LendingTree could be one of the biggest beneficiaries of that environment.

We’ve seen big gains already, so this is definitely one of the higher-risk, higher-reward bets on this list. But the stock remains down over 90% from its prior peak. I believe LendingTree’s earnings per share could potentially double over the next four years as the credit cycle turns and loan demand improves.

The company also has a debt load slightly larger than its market cap at present. Any reduction in interest expenses on that debt would provide an immediate boost to profitability. LendingTree is an asset-light, high operating leverage business, so any increase in revenue should really flow through to the bottom line.

There are certainly risks here given the company’s struggles and high debt levels. But for the speculative investor with a longer time horizon, TREE stock could offer massive upside if management can get the business back on track amid lower rates.

On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Omor Ibne Ehsan is a writer at InvestorPlace. He is a self-taught investor with a focus on growth and cyclical stocks that have strong fundamentals, value, and long-term potential. He also has an interest in high-risk, high-reward investments such as cryptocurrencies and penny stocks. You can follow him on LinkedIn.

Articles You May Like

3 Sleeper Stocks Positioned for Huge Growth by 2025
AI All Stars: 3 Stocks Leading the Charge in Artificial Intelligence
3 EV Stocks to Sell in June Before They Dive
The 3 Best Oil & Gas Stocks to Buy in June 2024
Rent the Runway Stock: The Recession-Proof Fashion Play for Bold Investors