Just exactly how dovish the Federal Reserve is at this time remains up for debate. Although the Federal Open Market Committee’s decision to hold interest rates steady last week sent a message, as is so often the case, the media and investors read a great deal more into the message than was meant to be conveyed.
Nevertheless, there’s little doubt the Fed is convinced an inflation-driving, roaring economy is nowhere on the horizon. The rate-setting committee isn’t planning on altering its target rate at least through the early part of next year, and concedes there’s a chance rates could be lowered at some point in 2020. Traders, meanwhile, are betting the nation’s base interest rate will start to slide lower before this year is over.
Nobody’s calling for higher rates, to be sure.
It’s a dynamic that should prompt investors to rethink how they want to position their portfolios for the foreseeable future. Namely, the smart-money move here is prioritization of names that thrive when rates are holding steady, or better yet, falling. Here’s a rundown of seven stocks to buy that fit that mold perfectly.
Home Depot (HD)
Home Depot (NYSE:HD) is perfectly suited for a mediocre economy supported by a dovish Fed, where even a steady Fed funds rate may allow long-term mortgage rates to ebb a bit lower. Not only do lower interest rates facilitate home purchases that drive sales of lumber and nails, cheaper money makes it more likely consumers will invest in home improvements.
And that has largely been what’s happening, even before the Fed became so accommodating last week.
Home sales and construction activity grew through 2017, but stagnated in 2018. Indeed, by the end of 2018, all of those data points were in decline. Even without the Fed’s help though, mortgage rates began to slide lower again at the very end of last year, coinciding with a recovery in starts, permits and purchases. March’s sales of new homes, for instance, reached a multi-month high of 692,000 units and most of this year’s new-home buying data has been better on a year-over-year basis with mortgage rates moving deeper into new 52-week low territory.
Point being, at least on this one front, cheaper money works.
Stag Industrial (STAG)
The relationship between interest rates and real estate investment trusts (REITs) is not nearly as black and white as many investors like to believe it is. Rising rates, for instance, raise the cost of capital, but rising rates also tend to drive up the payouts that rental real estate is best known for. The question is, how is that adjustment made? Through falling REIT prices, or improved dividends?
Not all real estate investment trusts are highly sensitive to effective changes in interest rates, however. Stag Industrial (NYSE:STAG), as an example, is a name that’s practically built from the ground up to thrive when the economy is “just good enough” to keep moving forward, but not quite strong enough to prompt higher interest rates as a means of containing inflation.
It has everything to do with Stag’s tenants.
The REIT focuses on warehouses, distribution centers and light manufacturing buildings, with a preference for purchasing property that’s already occupied. These tend to be businesses with lots of longevity that tend to stay put once a lease is signed.
Newcomers will be collecting a dividend of about 4.6% on their invested capital, though that payout grows like clockwork.
Yes, add e-commerce giant Amazon (NASDAQ:AMZN) to your list of stocks to buy when the Fed is dovish, and not just because the stock and the company have both proven to be juggernauts. Amazon increasingly relies on low-cost loans to finance its growth.
As of its most recently reported quarter, Amazon is servicing $23.3 billion worth of long-term debt, plus several billion more in debt-like obligations. Although most of that isn’t coming due in the near-term future, some is, and the company would certainly prefer to refinance at lower rather than higher interest rates; it spent $183 million on interest payments alone for the three-month stretch ending in March.
For a low-margin business like Amazon’s, every penny counts.
It’s not just a matter of financing costs anymore, however. Amazon is wading into the credit card business, unveiling plans to launch a secured credit card mostly meant to drive sales through its own platform; Prime members will get a 5% rebate on goods bought at Amazon.com.
Although it’s a secured card ultimately managed by Synchrony Financial (NYSE:SYF), cheaper capital makes the venture more profitable for the Synchrony/Amazon venture.
Intuitive Surgical (ISRG)
Surgical robot developer Intuitive Surgical (NASDAQ:ISRG) isn’t highly impacted by rising or falling interest rates. Hospitals will buy what they absolutely have to have, and the company’s da Vinci surgical devices are proving to be must-haves for many surgery departments.
That’s the point.
Nevertheless, it’s this sort of company that tends to fall into favor when investors don’t want to have to worry about the impact of interest rates … a backdrop that could still stop and turn on a dime. That sets the stage for some degree of performance edge.
Intuitive Surgical certainly has the chops to justify an investment in ISRG stock. This year’s projected 14.6% increase in revenue merely extends a long-standing trend, with that growth pace projected be maintained through next year as well. Better yet, strong top-line growth is driving even better bottom-line growth. The pros are calling for a per-share profit of $11.72 this year, up from last year’s $10.99, growing to $13.50 in 2020.
General Electric (GE)
It would be naive to suggest General Electric (NYSE:GE) wasn’t being added to a list of stocks to buy now at least partially because its turnaround appears to be taking hold. Much of that turnaround, however, is rooted in how well it can manage its cash flow, debt load and balance sheet.
That makes interest rates a monumentally important matter in terms of valuing GE stock right now.
General Electric is presently sitting on $107 billion worth of net debt, referred to as “borrowings” on its quarterly presentation. Although it has been working diligently to pare that figure back — mostly through the sale of assets — the task has proven tough to tackle. Its debt burden, in fact, cost the company more than $1.1 billion worth of interest expense last quarter alone. That’s still too much for a company that’s merely trying to produce positive operating cash flow, and still can’t.
If GE could just secure some cheaper financing though, a small savings could make a big difference.
Unfortunately, most of General Electric’s debt won’t come due until after 2023, and won’t likely be refinanced in the meantime. There’s more than $20 billion coming due over the course of the next four years though, which the company would clearly prefer to refinance at more accommodating rates.
Although cybersecurity outfit FireEye (NASDAQ:FEYE) is producing a positive cash flow and en route to actual GAAP income, it has relied on some debt to get there. Its most recent quarterly report indicates just a little less than $1 billion in long-term convertible notes are on the books, costing the company roughly $12 million in interest expenses per quarter.
That’s more than manageable.
With profits in sight though, and a good chance at least some of that paper will be converted to shares when it’s fiscally advantageous to do so, the modest debt level largely makes the matter a meaningless one for FireEye.
That’s not the reason FEYE stock has earned a spot in a list of stocks to buy when the Federal Reserve is sending mixed messages though. Rather, FireEye is increasingly attractive here, specifically because it’s so far removed from interest rate concerns. Computer hacking and data breaches are going to happen regardless of the economic backdrop, which makes the organization a more reliable play in an environment where a premium is apt to be placed on predictability.
Finally, add Anthem (NYSE:ANTM) to your list of stocks to buy while the Fed is dovish, for the same reason FireEye and Intuitive Surgical are on the list — the insurer is a way of sidestepping the question altogether, as consumers don’t finance the purchase of health coverage. It’s a business that’s not terribly sensitive to interest rates moving in either direction.
That said, do know that Anthem can still benefit from contained or falling borrowing rates. The company’s got $17.5 billion worth of long-term debt on its books, and though only a few billion of it is coming due within the next couple of years, if the company is savvy, it may opt to refinance what it can while long-term borrowing rates are near multi-year low levels.
And, given the insurer’s caliber, it shouldn’t have any problem securing fresh funding now that it’s available at lower costs.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.