6 Stocks That Will Benefit From a Dovish Federal Reserve

Posted on Tuesday, April 7th, 2020 by MarketBeat Staff
6 Stocks That Will Benefit From a Dovish Federal ReserveThe quaint correction that was labeled the “tech wreck” of 2018 seems like a distant memory to investors. What also seems like a distant memory is any thought of the Federal Reserve raising interest rates.

At the end of 2018, the Federal Reserve had raised its benchmark federal funds rate. With the trade dispute with China dragging on, there was increasing pressure on the Fed to lower interest rates. When interest rates are lower, stocks will generally rise as investors have no other option for growth.

In July 2019, the doves got their wish. But in a move that now seems to be a “what did they know move”, the Fed dropped rates again in October. The market soared to record highs in January and early February. Since mid-February however, the market has fallen dramatically, and the Fed juiced the market one more time by cutting rates down to levels not seen since the financial crisis.

None of us know for sure when the U.S. economy will be opened up. And while stocks are still a good investment, not every stock is a smart investment at this time. But some stocks perform well when interest rates are falling and that’s why we’ve prepared this presentation.

These six stocks stand to benefit from both low-interest rates and the unique economic conditions being brought on by the Covid-19 pandemic.

#1 - Home Depot (NYSE:HD)

The Home Depot logo

The first stock to look at is Home Depot (NYSE:HD). Just because many Americans are sheltering in place doesn’t mean they won’t need to make a home repair. In fact, you might argue that having more time at home will make it more likely that something will break down. Plus, many homeowners are taking advantage of their time in quarantine to work on long overlooked home improvement projects.

That’s one reason why HD stock has bounced off recent lows. In mid-March, when the economy was shutting down, Home Depot stock was down nearly 50%. It has since trimmed that loss. While it is still down nearly 10% for 2020, it is only down about 3% in the last 12 months.

And with lower interest rates, the cost of borrowing goes down. This means that this home improvement runway should be nice and long. Not to mention the pent-up demand for new home buyers once the most restrictive shelter-in-place guidelines are lifted.

Home Depot does not have a moat in this sector. But they have been ahead of the curve in terms of becoming an omnichannel retailer. This is the idea of companies delivering products to customers where and when they want it.

The interesting thing about omnichannel is that many companies are adopting an omnichannel strategy to compete with Amazon. However, it’s actually a strategy that plays very well with a society that will undoubtedly be altered in fundamental ways by the Covid-19 pandemic.

About The Home Depot
The Home Depot, Inc engages in the sale of building materials and home improvement products. Its products include building materials, home improvement products, lawn and garden products and decor products. The firm operates through the following geographical segments: U.S., Canada and Mexico. It offers home improvement installation services, and tool and equipment rental.Read More 

Current Price: $337.55
Consensus Rating: Buy
Ratings Breakdown: 17 Buy Ratings, 4 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $339.56 (0.6% Upside)


#2 - D.R. Horton (NYSE:DHI)

D.R. Horton logo

Right now investing in the stock of a homebuilder may seem suicidal. Who’s going to buy a home when they can’t leave the one they’re in now. Fair enough. However the argument for a stock like D.R. Horton (NYSE:DHI) is that wise investors play the long game. And here’s what we know.

When the Fed first cut interest rates in July, prospective home buyers largely shrugged it off. But when they cut rates again, it started having an impact. Anecdotally, in my small area of the country, many landlords were finding it difficult to find tenants. And realtors were busy around the holidays. Really busy.

And when we come out of this pandemic, and we will, prospective home buyers will continue to buy and build new homes. Investors seem to believe the same. DHI stock was up nearly 70% on a year-over-year basis at the end of January. The stock plunged by that amount, and more, as the news of the Covid-19 pandemic broke.

However, as the news cycle has begun to change, so have the prospects for D.R. Horton. Yes, cancellations are up. And yes, the company has withdrawn guidance based on uncertainty surrounding the impact of the virus. But lower interest rates will keep mortgage rates low and that should be a good sign for the company later in 2020 and beyond.

About D.R. Horton
D.R. Horton, Inc engages in the construction and sale of single-family housing. It operates through the following segments: Homebuilding and Financial Services. The Homebuilding segment includes the sub-segments East, Midwest, Southeast, South Central, Southwest and West regions. The Financial Services segment provides mortgage financing and title agency services to homebuyers in many of its homebuilding markets.Read More 

Current Price: $88.49
Consensus Rating: Buy
Ratings Breakdown: 17 Buy Ratings, 2 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $103.65 (17.1% Upside)


#3 - Kellogg (NYSE:K)

Kellogg logo

Dividend stocks tend to perform well as interest rates decline. Value and income investors typically flee bonds and are looking for a return wherever they can get it. That makes stocks like Kellogg (NYSE:K) very attractive. The company has increased its dividend for the last 15 years (the last increase was issued in July 2019).

In addition to offering investors an attractive, and reliable, dividend, the company was offering some nice growth potential before the Covid-19 outbreak and subsequent social distancing guidelines. In the face of declining cereal sales, the company has put an emphasis on its snack foods. And when it comes to snack foods, Kellogg’s has a powerful quintet of brand names (Pop-Tarts, RXBAR, Pringles, Rice Krispies Treats, Cheez-It)  that account for 75% of the company’s total snack sales.

Kellogg’s is also moving into the meatless product category with a soy-based line of products know as “Incogmeato”. And, Kellogg was also showing growth in emerging markets. And again, all of this was prior to the imposed social distancing guidelines.

With many Americans limited to only going out of their house to get groceries, it puts Kellogg’s in a good position. It will be interesting to see if the company gets a bump in sales into its core cereal products, as well as the snack foods that many families will find essential as they are confined in their homes.

Kellogg stock is down about 5% in 2020, but is up nearly 10% in the last 12 months. In its last earnings report, Kellogg’s beat analysts’ expectations for earnings and revenue. It’s likely that the company will enjoy a similar beat for the first quarter report which is scheduled for the end of April.

About Kellogg
Kellogg Co engages in the manufacturing, marketing, and distribution of ready-to-eat cereal and convenience foods. The firm markets cookies, crackers, crisps, and other convenience foods, under brands such as Kellogg's, Cheez-It, Pringles, and Austin to supermarkets in the U.S. It operates through the following geographical segments: North America, Europe, Latin America, and AMEA(Asia Middle East Africa).Read More 

Current Price: $63.37
Consensus Rating: Hold
Ratings Breakdown: 4 Buy Ratings, 5 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $66.38 (4.7% Upside)


#4 - American Electric Power (NASDAQ:AEP)

American Electric Power logo

Typically, utilities line American Electric Power (NYSE:AEP) are not the first stocks to come to mind in the context of falling interest rates. After all, when the dollar gets weaker, it raises the cost of energy and commodities.

But therein lies the beauty of the situation for investors in AEP. Because the company is a utility, it generally operates as a monopoly, or at worst a duopoly, in the markets it services. That means it can pass along rate increases to its consumers without disruption.

However, these are far from normal times. The intense social distancing measures being undertaken throughout the country is having a negative effect on utility usage. And that is having an effect on AEP stock. Since the middle of February, the stock has dropped 20% and is down nearly 15% in 2020.

Ultimately this decline in demand will be temporary. Slowly but surely businesses will reopen. And as they do, electricity use will begin to normalize. There is no question that there is considerable debate over when the United States will be open for business. And that makes it hard to make a prediction about the short-term outlook for the stock. The truth is the company may have a challenging 2020, but investors can capture a nice dividend for their trouble. Over the long haul, AEP looks like a well-run company that is a sound investment in any market.


Stock #6 just crossed over both its 50-and 200-day moving averages, which is a bullish sign 

About American Electric Power
American Electric Power Co, Inc engages in the business of generation, transmission and distribution of electricity. It operates through the following segments: Vertically Integrated Utilities, Transmission & Distribution Utilities, AEP Transmission Holdco and Generation & Marketing. The Vertically Integrated Utilities segment engages in the generation, transmission and distribution of electricity for sale to retail and wholesale customers through assets owned and operated by its subsidiaries.Read More 

Current Price: $82.97
Consensus Rating: Buy
Ratings Breakdown: 8 Buy Ratings, 1 Hold Ratings, 1 Sell Ratings.
Consensus Price Target: $94.99 (14.5% Upside)


#5 - Wells Fargo (NYSE:WFC)

Wells Fargo & Company logo

Arguably, betting on Wells Fargo (NYSE:WFC) is not for the risk-averse investor. Banks and other financial stocks are often the big losers when interest rates decline. But Wells Fargo is trading at levels that may have become too low to simply ignore out of hand.

First the bad news. The company’s stock hit the undeniably bearish “death cross” technical signal. On March 5, the 50-day moving average of WFC stock crossed below its 200-day moving average. And sure enough, the stock price fell.

But the stock is trying to find a base. And with the newly signed stimulus bill, Wells Fargo may have an opportunity. In 2018, the Federal Reserve imposed growth limits on Wells Fargo as punishment for the revelation that the company had opened millions of fake accounts and used those accounts to charge customers unnecessary mortgage fees or for auto insurance.

But, as Emily Fitter reported in the New York Times, with so many small business owners filing requests to get a part of the stimulus money, the Fed is considering lifting those sanctions to make it easier for the bank to lend. Although this would be likely a temporary truce, it would give the bank a chance to establish credibility.

The scandal is far from behind the bank. This is still a risky stock to buy, but trading at around 7x earnings, it is a cheap stock. And with a dividend yield that is currently at 6.83%, investors do get some shelter from the risk they accept.

About Wells Fargo & Company
Wells Fargo & Co is a diversified, community-based financial services company. It is engaged in the provision of banking, insurance, investments, mortgage, and consumer and commercial finance. It firm operates through the following segments: Community Banking, Wholesale Banking, Wealth & Investment Management, and Other.Read More 

Current Price: $47.51
Consensus Rating: Buy
Ratings Breakdown: 12 Buy Ratings, 8 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $47.45 (0.1% Downside)


#6 - AngloGold Ashanti (NYSE:AU)

AngloGold Ashanti logo

Gold is the ultimate safe-haven asset. When the Fed lowers rates, it has a destructive effect on the U.S. dollar. By destructive, it means that it normally has an inflationary affect (i.e. the dollar doesn’t buy what it used to).  

However, these are strange times. The United States has just introduced $6 trillion of new stimulus (i.e. money created out of thin air) into our economy. But the U.S. economy was arguably the healthiest of all economies heading into the crisis. As a result, foreign investors are buying U.S. treasuries and propping up the dollar. We can’t destroy the currency if we wanted to. And the Fed can’t seem to get the inflation it seems to want so badly.

The common response to lower interest rates is for investors to flock to gold. But owning physical gold can be tricky. And right now, getting your hand on some actual bullion may take some time. That’s where a stock like AngloGold Ashanti (NYSE:AU) comes in. The stock is up over 40% in the last 12 months. And with interest rates likely to remain low for a considerable time, the stock should have a nice runway for growth.

The stock just crossed over both its 50- and 200-day moving averages, which is a bullish sign for the stock.

About AngloGold Ashanti
AngloGold Ashanti Ltd. engages in the exploration, mining, and production of gold. It operates through the following business segments: Africa, Australia, and Americas. The Africa segment consists of Ghana, Guinea, the DRC (Democratic Republic of the Congo), and Tanzania. The Americas segment comprises of Argentina, Brazil, and projects in Colombia and the United States.Read More 

Current Price: $15.18
Consensus Rating: Hold
Ratings Breakdown: 2 Buy Ratings, 6 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $25.00 (64.7% Upside)

 

It may not seem like it, but the fundamentals of the economy still apply. When interest rates are low, certain stocks and sectors tend to outperform. But these are interesting times. Social distancing will change our economy. It may change the growing bias against homeownership. It will definitely be an additional catalyst for e-commerce.

And there are some stocks that have an opportunity to surprise investors with their performance.

When interest rates are lower, bond yields tend to decline as prices rise. And even as investors are trying to keep cash on the sideline, their cash becomes less valuable as interest rates fall.

For that reason, dividend stocks can be a safe haven because of the income they provide investors. A common denominator of all the stocks in this presentation is that they all pay a dividend. But each of the stocks in this presentation also has unique opportunities for growth. And ultimately, the total return of a stock should be an investor’s primary concern.

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