Interest rate cuts appear imminent in the coming months, though likely not as soon as March. However, I believe cuts could materialize in the second quarter or sometime thereafter. Regardless of the exact timing, consensus holds that rates will fall at some point this year. As details on the pace and scale of cuts emerge, investors can position themselves accordingly by looking into these rate cut stocks.
In my view, one smart approach is to buy stocks in companies hampered by high rates, but poised to thrive when the cost of capital declines. Many profitable firms are having trouble expanding margins amid lofty interest expenses. Additionally, debt loads seem disproportionately burdensome when rates spike, worrying investors. With cuts on the way, these companies could see earnings and valuation multiples expand.
We can also target sectors known to lag in high-rate environments but lead when the tide turns. As the market anticipates the economic stimulus of easing monetary policy, these groups tend to rally the most.
With this backdrop in mind, here are seven rate cut stocks to look into:
Li Auto (LI)
Li Auto (NASDAQ:LI) has been firing on all cylinders recently, and I expect it to accelerate significantly higher in the coming months as it seizes the spotlight among EV companies.
As a prime example, Li Auto just reported fourth-quarter revenue that grew 134% year-over-year to hit $5.9 billion. The company delivered nearly three times as many vehicles versus last year, mainly led by surging demand for Li Auto’s large, premium SUVs. Quarterly profit also doubled YOY and hit $810 million, capping a standout 2023 where Li Auto generated its first-ever annual profit.
Bullishly looking ahead, management issued rosy guidance for 2024 in its recent earnings report. In addition, Li Auto plans to launch five brand new models this year, targeting up to 800,000 total vehicles sold. The company continued making progress in expanding its vehicle margins. Li Auto secured a strong vehicle margin of 22.7% — evidence that many other EV startups are failing to expand margins like Li can.
Li Auto confirmed in late December 2023 that it will start making deliveries of its newest electric vehicle product, the Li Mega multipurpose vehicle, in March 2024. When the company first unveiled the Li Mega EV at the Guangzhou Auto Show last year, Li Auto said the EV would cost consumers less than 600,000 Chinese Yuan ($84,500) and that it already received 10,000 reservations within the first two hours of reservations opening.
I am very bullish about Li Auto’s prospects, expecting it to accelerate much further in the quarters ahead. While Li Auto does not sell many vehicles in the U.S. yet, it can make significant inroads into European countries soon. With strong growth trends, reasonable valuation multiples and a robust EV product pipeline, Li Auto warrants a spot in growth-oriented portfolios — especially those looking to capitalize on coming Fed rate cuts.
United Airlines (UAL)
Airline companies were arguably the hardest hit during the Covid-19 pandemic, racking up significant amounts of debt still left unpaid. These companies suffered tremendously in subsequent years, with the pain still ongoing despite a travel boom providing some lift. Even with higher demand, airline stocks have struggled to take off given lofty interest rates worldwide — causing heightened pain in servicing all the accumulated debt.
For example, United Airlines (NASDAQ:UAL) is spending around $450 million per quarter on interest expenses alone. On the other hand, the company generated $600 million in quarterly net income in Q4. With rates set to decline, I believe United can free up significant cash in the coming quarters.
The stock already trades at a bargain 4.7x forward earnings. The airline recently forecasted $9 to $11 in EPS this year, with analysts predicting big jumps in future profits. Projections call for 2026 EPS to soar above $14 — all while the stock languishes around $45 currently. I see sizable upside from today’s levels as rate cuts bolster United’s earnings power.
The entire airline industry should experience multiple expansion in a lower-rate environment. And value-priced carriers like United Airlines stand to benefit most as earnings get an added boost from lower interest costs.
Aehr Test Systems (AEHR)
As a smaller semiconductor equipment supplier, Aehr Test Systems (NASDAQ:AEHR) is at higher risk than larger-cap alternatives. However, I also see massive upside potential in AEHR once rate cuts take hold at full force.
A sizable chunk of Aehr’s sales stems from the electric vehicle industry, as the company produces key testing equipment for EV chips and sensors. Due to high interest rates putting a damper on EV sales volumes lately, Aehr stock has sunk 68% from its September 2023 peak. However, I expect a sharp rebound once EV sales pick back up.
Recent order activity backs up my bullish thesis. Aehr recently secured $23 million in new follow-on orders, pointing to strong customer demand. Moving forward, analysts forecast over 30% annual EPS growth. Yet the stock trades at just 22x forward earnings — a cheap multiple given the sizable growth anticipated.
As rate cuts spark an acceleration in the entire EV ecosystem, I expect Aehr Test Systems to be a major beneficiary. AEHR should deliver outsized returns as monetary policy pivots to supporting economic growth once again.
PayPal (PYPL)
I believe PayPal (NASDAQ:PYPL) offers one of the best values in the entire market. Investors buying at today’s prices should be richly rewarded in the next 24 months, if not sooner, as the value proposition becomes clearer. The entire fintech space stays deeply undervalued, with PayPal standing out as the largest player. This household name wields tremendous global reach and has delivered consistent revenue and profit growth, bouncing back strongly from its post-Covid-19cooldown.
However, Wall Street fixates on one metric here — active user counts. While that tally has stagnated and recently turned negative, I don’t view it as a big enough problem to justify bargain basement pricing over the past two years. PayPal’s user base may have shrunk, but it’s squeezing more sales and profits from retained users as their transaction volumes climb. PayPal retains a sticky user base poised to drive nearly 8% annual EPS and revenue growth going forward — strong for a fintech firm.
It bought back $5 billion in stock last year. It also beat Q4 EPS estimates by 8.6% and revenue estimates by 2.6%, yet still no re-rating. Impressively, its net margin expanded 40% year-over-year to 17.5% last quarter. I believe PYPL looks criminally undervalued at around $60 per share — rate cuts should stimulate digital transactions and significantly more upside.
Vestas Wind Systems (VWDRY)
Vestas Wind Systems (OTCMKTS:VWDRY) is an offshore wind company. It has struggled the past two years as renewable energy got placed on the back burner — but I don’t expect that to persist forever. Down 46% from its peak, Vestas financials are recovering strongly. Its Q3 net income of $148 million turned 2023 profitable again, with $77 million in full-year profits.
Despite razor-thin 1.5% margins and ongoing industry headwinds, Vestas grew revenue and earnings in 2023. It achieved a record 18.4 GW order intake last year and aims to build on that momentum in 2024. Its Power Solutions segment should strengthen dramatically in 2024, while the Services segment remains a steady, non-cyclical grower.
Vestas holds a hefty $3.7 billion debt load equal to its cash position, compressing profitability and margins via interest expenses. But sustained rate cuts coupled with Europe’s desire to wean itself off Russian oil and gas could massively improve margins over a multi-year frame. That would unlock substantial share price upside. With asset values and earnings power skewed by high rates, Vestas should catch a bid as policy pivots to economic stimulus.
Riot Platforms (RIOT)
Bitcoin (BTC-USD) keeps climbing thanks to spot ETFs and upcoming “halving” tailwinds. However, one overlooked catalyst is how rate cuts could supercharge further upside. By making traditional assets less rewarding, lower rates should stimulate investor demand for alternative stores of value like Bitcoin. Banks and hedge funds are already jumping in, so cuts would be rocket fuel.
Riot Platforms (NASDAQ:RIOT) rapidly expands operations ahead of sector appreciation, stockpiling a trove of 7,648 Bitcoins as of January. It recently ordered 31,500 next-gen miners from MicroBT for $97.4 million. Riot’s early re-positioning for recovery provides leverage while Wall Street still fixates on halving headwinds. If Bitcoin runs, miners will follow. With mines scaling aggressively and its balance sheet gaining leverage to crypto, substantial upside exists for Riot.
Under Armour (UA)
Under Armour (NYSE:UA) develops and distributes athletic apparel and accessories, may not be as rate-sensitive as other picks here. However, it can still deliver outsized returns as discretionary markets awaken. Lower rates should stimulate apparel spending. After years of stagnation, the stock rallied 25% off its November lows as Under Armour lifted profit guidance.
Long-term expectations call for robust growth. EPS is forecast to double from 49 cents in fiscal 2024 to $1 in fiscal 2027, making its forward P/E ratio just 8X three years out. Sales growth should also persist in the mid-single-digits over the next decade, combined with EPS expansion to drive 2033 EPS above $2.30 by estimates. If execution accelerates, Under Armour could realize even greater upside. It beat fiscal Q3 EPS estimates by 18%, proving it still has room to outperform.
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.
