Inflation doesn’t appear to be coming down fast enough to suggest that interest-rate cuts are around the corner. But that could be a good thing for investors because it means there’s still time to buy rate-sensitive stocks that could soar when rate cuts occur. After all, it’s a question of when rates will come down, not if.
Three stocks that could take off once the Fed starts cutting are Home Depot (HD 0.43%), Amazon (AMZN 0.90%), and AT&T (T 0.53%). Here’s why now may be an opportune time to add these stocks to your portfolio.
1. Home Depot
Home Depot is a top home repair retailer that makes for a solid long-term investment. Things have slowed for the retailer as consumers tightened their budgets and spending. But as interest rates come down, the business may benefit significantly from that development.
Lower rates will make it less costly for people to borrow money to take on expensive home repair projects. There may even be some pent-up demand right now. Some home repairs may have been neglected because consumers haven’t been able to afford them. But once rates come down, that could change.
CEO Ted Decker previously stated that the company expected 2023 “to be a year of moderation in demand for home improvement.” Home Depot has been struggling to generate sales growth after some impressive performances in recent years. But with profit margins of normally 10% or more and fairly safe long-term demand for its products and services, the company may be an excellent stock to buy right now.
2. Amazon
Amazon generally doesn’t struggle with demand as it’s become a go-to option for any type of consumer spending. Whether you’re making a small or large purchase, the company’s quick one-day or same-day delivery options make it a more attractive option than going to a brick-and-mortar store to buy necessities. For the last three months of 2023, the company reported net sales of $170 billion, which rose 14% year over year.
The downside is that Amazon’s margins aren’t terribly high, due to its competitiveness. Last quarter’s net income of $10.6 billion was just 6% of the top line.
A reduction in interest rates will make it less costly for the company to invest in its operations. Amazon has some big plans on the horizon, including developing an artificial intelligence (AI) model (“Olympus”) that could rival ChatGPT and expanding its online streaming platform.
Those same consumers looking to make home repairs may buy supplies from Amazon, as well. A reduction in interest rates could pave the way for greater spending in general, which may accelerate the company’s growth rate.
Even though Amazon is trading near its 52-week high, the stock could go even higher once rates start to come down.
3. AT&T
Telecom company AT&T isn’t likely going to see an uptick in revenue if interest rates come down. But it will help bring down the risk related to its spending on its 5G network.
A big concern for investors related to telecom is often the significant costs and debt that come with these businesses and the seemingly endless need to spend on upgrades and infrastructure improvements. Lower rates will help to reduce borrowing costs for AT&T.
One immediate way that lower interest rates could help AT&T stock is by attracting more income investors. Today, interest rates are high, and many people may be inclined to put money in the bank or invest in bonds to take advantage of higher risk-free rates.
While AT&T’s stock offers a high dividend yield of 6.5%, it comes with some risk mainly tied to the potential that the stock may decline in value, not that the payout is unsustainable. AT&T reported encouraging results for 2023, as adjusted operating income of $24.7 billion was higher than the $23.5 billion the company reported a year earlier. Operating cash flow of $38.3 billion was also higher than the $35.8 billion the company generated in 2022.
AT&T’s stable financials make this a good dividend stock to buy right now. It could be a prime target for investors looking for a high payout when rates start to come down.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Home Depot. The Motley Fool has a disclosure policy.
