These 5 stocks will jump after interest rate cuts

Some stocks may respond better to an interest rate cut, according to Goldman Sachs, although it could take until November to see the first (and perhaps only) easing.

Likelyhood of Fed rate cuts

Source: Investment Strategy report Raymond James

The lack of progress on the inflation front forced the Fed Monetary Policy Committee to keep the cost of money unchanged at the highest levels for 23 years, in the range between 5.25% and 5.5%.

The uncertainty seen in the recent period has pushed 10-year Treasury yields higher, rising to almost 4.75% in April, compared to levels below 4% at the beginning of the year. However, after Fed President Jerome Powell declared that the central bank’s next step would not be a rate increase, the 10-year yield fell by 9 basis points. For this reason, Goldman Sachs has identified a list of stocks with high-interest rate sensitivity. These stocks could respond positively if Treasury yields fall further.

1. Super Micro Computer

Super Micro Computer is a company that has attracted more and more attention in recent years due to its rapid growth, becoming a stock of interest to investors seeking high exposure to the technology industry and computer-related products. artificial intelligence. Just two years ago, Super Micro was considered primarily a cyclical hardware maker, with no particularly distinctive technologies. As a result, its valuations were relatively low, with an exceptionally low multiple.

However, the rapid evolution of the AI industry has radically changed market perception. Thanks to increased demand for advanced hardware solutions, Super Micro’s revenue and earnings have accelerated significantly. Financial data released on April 30 showed revenue up 200% quarterly, albeit slightly below expectations. Net income came in at $402.5 million, or $6.56 per share, compared to $85.8 million, or $1.53 per share, in the same period a year earlier.

This extraordinary growth has led the company to upwardly revise its revenue forecast for fiscal 2024, from an estimate of $14.3 billion to $14.7 billion to a range of $14.7 billion to $15.1 billion. As a result, Super Micro’s P/E multiple has also risen, making the stock more sensitive to long-term interest rates, which can affect the value of future earnings.

Super Micro Computer EPS

Source: TheMotleyFool

The Federal Reserve’s recent announcement to keep rates higher for longer has impacted Super Micro shares, slowing their momentum. But the good news is that the Fed does not plan to cause a recession to lower rates, offering some hope for a potential recovery in the near future.

2. Halliburton

Halliburton Co. is a leading provider of services and products to the energy industry, with a focus on the exploration, development, and production of oil and natural gas. The company is considered one of the most interest rate sensitive, a critical element for the energy sector. Interest rates significantly influence the cost of capital and play a key role in equity valuation models, determining the appropriate rate to discount future cash flows.

A recent report from Jefferies, published in late April, confirmed the “Buy” rating for Halliburton, with a price target set at $50. This positive view is based on the analysis of the company’s strong financial outlook and position in the market, especially in relation to its first-quarter 2024 results and full-year guidance.

In the first quarter of 2024, Halliburton reported net income of $606 million, or $0.68 per diluted share, slightly lower than the same period in 2023. However, adjusted net income was $679 million dollars, or $0.76 per diluted share, indicating slight growth. Total revenue for the first quarter of 2024 was $5.8 billion, an increase of 2% compared to the first quarter of 2023. Operating profit remained stable at $987 million.

Looking ahead to 2025, potential upside is expected as gas markets recover, helping justify the “Buy” rating. According to Jefferies, Halliburton is well-positioned to meet or exceed market expectations for 2024, providing a solid foundation for sustained growth. Wells Fargo also affirmed its “Buy” rating, with a price target of $49, underscoring the company’s growth potential in the near future.

3. Charles Schwab

Charles Schwab (SCHW) recently reported its first-quarter earnings on April 15, highlighting clear signs of a positive medium-term earnings outlook. The first increase in revenue since the year 2022 was recorded, indicating a trend that is expected to strengthen over the next one to two years, when Schwab expects to repay high-cost financing sources, improving net interest margin. A significant increase in low-cost transactional liquidity is still expected. These results were in line with analysts’ expectations.

According to some analysts, Schwab’s current stock price aligns with its long-term fair value set at $73 per share. With 2025 P/E of approximately 22.5x and a compound annual growth rate of 9.5% for net revenues, net interest income, resulting from the recovery in deposits and the reinvestment of maturing fixed income proceeds, will continue to contribute significantly to revenue growth.

BofA recently raised its price target on Charles Schwab from $68 to $70, citing the strong macroeconomic environment and rising markets. According to BofA, Charles Schwab could be well positioned for lower interest rates, thanks to the 3.8-year duration of its investment banking portfolio and the $18 billion negative balance of accumulated other comprehensive income, which would reverse with a decrease in rates.

4. Carnival

Carnival weekly graph

Source: Tradingview

Carnival is among the stocks most sensitive to the Federal Reserve’s interest rate decisions. Shares of the cruise company suffered a significant decline in 2024, falling as much as 10%. This decline is partly attributable to the possibility that higher interest rates could negatively impact demand for cruises, as these are considered discretionary spending.

With higher rates, consumers may be less inclined to spend large amounts on vacations, particularly due to rising credit card costs. This could lead to greater pressure on the shares of Carnival and other companies in the sector. However, last Thursday, Carnival reported encouraging financial results, with quarterly revenue increasing more than 40% and an operating profit of $384 million, compared to an operating loss of $1.135 billion in the same quarter a year earlier. These results could indicate a recovery in the cruise industry, but interest rate uncertainty remains a significant risk factor. In any case, a rate cut would be a positive element for the stock.

5. Raymond James Financial

Raymond James daily graph

Source: Tradingview

Raymond James Financial has shown notable growth in recent years, with a 25% compound increase in earnings per share (EPS) over the past three years. The company managed to maintain stable EBIT margins while growing revenue by 8.4% to $12 billion. However, the recent trend of slowing EPS could affect overall profitability, especially if financing costs remain elevated for longer.

For the fiscal second quarter ended March 31, 2024, Raymond James reported net revenue of $3.12 billion and net income available to common shareholders of $474 million, or $2.22 per diluted share. Excluding acquisition-related expenses, quarterly adjusted net income to common shareholders was $494 million, or $2.31 per diluted share. Quarterly net revenues reached a record high, increasing 9% compared to the same quarter last year and 3% compared to the previous quarter. This increase was driven by growth in wealth management, which reached $1.52 billion.

RJF, EPS variation

Source: SeekingAlpha

Despite the strong performance of investment banking and brokerage, Raymond James has also faced some challenges. The company set aside funds to cover credit losses in the banking sector and saw expenses rise in the quarter, which affected results. Additionally, the release of legal and regulatory reserves and salary costs contributed to the change in net profit.

The overall picture shows a solid company, but with some uncertainties arising from the economic environment and higher financing costs, which could impact future growth.

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Original article published on Money.it Italy 2024-05-08 16:01:00. Original title: Questi 5 titoli saranno i più reattivi al taglio dei tassi di interesse