Earlier this month, Wharton’s Jeremey Siegel suggested that the Fed should “make an emergency 75 basis-point cut in the federal funds rate.” This suggestion came after a disappointing jobs report. Jeremey further indicated that fed fund rates should be in the range of 3.5% to 4%. With aggressive rate cuts on the cards, it’s a good time for some portfolio readjustment to consider stocks to buy that will benefit from expansionary policies.
An obvious choice is gold mining stocks with the precious metal likely to trend higher on rate cuts. Further, the objective of easy money policies is to boost consumption and investment spending. It’s therefore likely that retail stocks will perform.
At the same time, industrial commodities and energy as an asset class tend to do well during times of lower cost of money. I also remain bullish on cryptocurrencies and Bitcoin (BTC-USD) has made a strong comeback after the recent correction.
The idea would be to consider some of the most undervalued names from these industries for quick returns.
Barrick Gold (GOLD)
Barrick Gold (NYSE:GOLD) is an undervalued gold miner that’s poised for a breakout rally in the coming quarters. It’s worth noting that even as gold trends higher, the stock has remained sideways year-to-date. At a forward P/E of 14.3, GOLD stock is worth accumulating. I would expect 30% to 40% returns within the next 12 months.
From a fundamental perspective, Barrick has six tier-one gold assets. The company also has quality copper assets that will support long term growth. Further, an investment grade balance sheet positions the company for aggressive capital investments. Between 2023 and 2030, Barrick has guided for gold equivalent production growth of above 30%.
It’s important to note that with gold trending higher, operating cash flows will swell. This would imply headroom for healthy dividend growth and value creation through share repurchase. For Q2 2024, Barrick reported operating cash flow of $1.2 billion. This would imply an annualized OCF potential of $5 billion.
Occidental Petroleum (OXY)
Occidental Petroleum (NYSE:OXY) was in the limelight as Warren Buffett increased stake in this oil & gas major. However, OXY stock has remained subdued with macroeconomic headwinds impacting oil prices. With the possibility of aggressive rate cuts, the outlook for oil is bullish. It’s therefore a good time to accumulate the stock before it surges higher.
An important point to note is that Occidental has focused on deleveraging and improvement of credit metrics. For the first eight months of the year, Occidental has retired $2.3 billion in debt. As credit metrics improve, I expect OXY stock to be re-rated.
Another point to note is that for Q2 2024, Occidental reported free cash flow of $1.3 billion. Even with the subdued oil prices, the oil & gas exploration company is positioned for an annual FCF of $5.2 billion. With the likelihood of oil trending higher, I expect FCF to swell. This will support the objective of deleveraging. At the same time, capital investments are likely to be aggressive and support steady production growth.
Target Corporation (TGT)
Consumption spending is the key driver of U.S. GDP growth. An important part of that is retail sales and with the possibility of aggressive rate cuts, it’s a good time to buy undervalued retail stocks. Target Corporation (NYSE:TGT) stock has remained sideways in the last 12 months and looks undervalued at a forward P/E of 14.5. Further, TGT stock offers a dividend yield of 3.3%.
It’s worth noting that for Q1 2024, Target reported comparable sales decline of 3.7% on a year-on-year basis. However, the coming quarters are likely to be better with the retailer guiding for annual comparable sales growth of 0 to 2%. The company expects to return to growth in Q2 2024. Therefore, with better numbers coupled with rate cuts, I expect a breakout for the stock.
An important point to note is that Target continue to invest in new stores and store modifications. The company opened seven new stores in Q1 and digital sales were robust. With omni-channel presence and focus in operational efficiency, I expect margin expansion in the coming quarters.
On the date of publication, Faisal Humayun 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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
