Lower interest rates stimulate the economy primarily by lowering lending rates. The stock market and interest rates have an inverse relationship whereby rising interest rates lead to falling share prices. That phenomenon was on display throughout 2022 and 2023. The opposite phenomenon also holds true whereby lower interest rates increase share prices.
It looks like we are headed towards such an environment with the Federal Reserve strongly hinting that the first rate cuts in 4 years are coming in September.
Investors know where to look to find the anticipated winners. Tech stocks will receive a renewed bout of attention. And other growth sectors should thrive as the funding for that growth becomes cheaper. At the same time, many less obvious opportunities merit attention.
So, let’s uncover seven hidden gems that investors should expect to thrive in a low interest rate environment.
Realty Income (O)
Realty Income (NYSE:O) is one of the best stocks from within the Real Estate Investment Trust (REIT) sector. Historically, REITs perform well and have exhibited positive performance following peak interest rates.
Realty Income should perform particularly well following this peak rate cycle. Although the company has continued to grow its earnings over the past few years while facing higher rates, share prices have fallen.
O shares are down nearly 22% from their pandemic high of $74. That high corresponded with the first few rate hikes in 2022. As lending costs increased, the value of Realty Income fell. It’s a fairly well-worn pattern that investors would do well to follow. Now that we’ve reached peak rates, Realty Income is positioned to thrive again.
The firm shows reasonable upside potential while currently paying a dividend yielding 5.4%. Earnings are continuing to grow meaning the company dividend is safe. Also, it’s one of the best monthly dividends overall and offers an increased reinvestment schedule relative to quarterly dividend stocks due to a higher number of payments.
Ibotta (IBTA)
Ibotta (NYSE:IBTA) is a cashback app with a well-positioned stock for a low interest rate environment. In fact, the company has been performing well even in this current high interest atmosphere.
With Ibotta, customers link their loyalty cards and payment accounts to Ibotta allowing the it to credit their qualifying purchases. Once the company does that, it credits their accounts with a cashback reward.
Notably, the company currently has sufficient cash reserves to cover its interest payments. That position should improve as interest rates fall. Additionally, it serves as an indication that Ibotta is a company capable of strong operations in any rate environment. Also, IBTA holds more cash than debt on its balance sheet.
The company was profitable in 2023 and expects nearly 23% top line growth in 2024. It will continue to be profitable overall per analyst predictions. I think investors should pay attention to Ibotta because healthy earnings expansion is predicted in 2025.
Entergy (ETR)
Entergy (NYSE:ETR) provides electricity across southern states generated through nuclear, coal, natural gas and renewable sources.
Recently, investors have become aware of the increasing demand put on the electrical grid due to the growth of artificial intelligence (AI) especially in relation to data centers. Did you know that 1% of all electricity demand globally is attributable to data centers? That fact serves as a stark reminder of the opportunity for AI to increase the prices of utilities stocks.
AI hyperscalers are rushing to install as many AI chips as possible at data centers located throughout the U.S. Also, data centers are being built in lower tax areas where the cost of construction is lower. Entergy is positioned to capitalize on the opportunity given its location.
Lower rates should prompt greater capital expenditures from AI hyperscalers who should soon face lower interest fee servicing fees. Consider investing in Entergy for its position relative to the opportunity and its dividend.
Angel Oak Mortgage (AOMR)
Angel Oak Mortgage (NYSE:AOMR) offers a dividend yielding more than 10% at the moment. Generally speaking, dividends in that range are highly speculative and risky. However, Angel Oak Mortgage’s dividend does not look to be especially risky overall.
During the first quarter the company reported 51 cents of net income under GAAP reporting practices. It was only liable for 11 cents of distributable earnings during the same time frame. And, it paid a dividend of 32 cents during the first quarter of fiscal year 2024.
Angel Oak Mortgage continues to perform reasonably well in a high rate environment while also operating a non-traditional mortgage business. The company takes on higher risk mortgages including non-qualified mortgages and others designed for borrowers with unique financial situations. Therefore, it should improve operationally as lending costs fall and risks are alleviated.
Grindr (GRND)
Grindr (NYSE:GRND) operates a dating app specific to the LGBTQIA community. Its stock has appreciated by more than 30% in 2024 and more than 90% over the past 12 months.
Generally speaking, text stocks like Grindr tend to perform well in a falling interest rate environment for reasons that have been discussed many times. Grindr doesn’t have a high level of debt, instead operating with moderate levels of debt. Nevertheless, the company could seek to take on additional debt which will be coming cheaper in the following months. Any such would likely be used to coax even higher growth rates out of the company’s operations.
Investors should consider Grindr because the company is moving into profitability in 2024 with massive earnings expansion expected throughout 2026. Although Grindr has experienced strong price appreciation over the past 12 months, it is expected to rise by approximately 30% per the most recent consensus targets.
Aspen Aerogels (ASPN)
Aspen Aerogels (NYSE:ASPN) sells aerogel insulation products in the sustainable materials market in the U.S.
The company doesn’t operate with particularly high levels of debt. A low interest rate environment directly benefits companies that do operate with high levels of debt immediately making them more viable. Aspen Aerogels operates with moderate levels of debt. The company’s liquid assets exceed its short-term obligations. There’s likely no reason for the company to seek additional funding at the moment.
The reason I think the company will garner further attention moving forward is that the markets continue to pivot into small cap stocks overall. Investors have grown weary of the dominance of large tech over the markets. Aspen Aerogels is one such small-cap opportunity that is expected to reach profitability in 2024.
Forestar Group (FOR)
Forestar Group (NYSE:FOR) is a booming residential lot developer which operates as a subsidiary of well-known builder D.R. Horton (NYSE:DHI).
Falling interest rates should spur an increase in building activity and sales of the lots owned by Forestar Group. Revenues fell during the most recent three months yet increased over the last nine. The company appears particularly well-positioned given the fact that it increased its residential lot holdings by 40% in the most recent quarter.
In the Q3 of fiscal year 2024, net income increased by 29% to $121.8 million over the last nine months. Operating efficiently, FOR is decreasing interest rates that should prompt a spike in building activity and loan origination.
It looks like Forestar Group was able to pick up large tracts of undeveloped residential land at low prices due to the current lull in demand because of high interest rates. That is precisely the power of large companies. They have the resources to buy up massive amounts of assets at such times. Those lots should be increasing in value as interest rates fall and demand rises.
On the date of publication, Alex Sirois did not have (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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
