JP Morgan (NYSE:JPM) believes that there is a 35% chance of recession in the U.S. by the end of the year. Further, the odds of recession in the first half of 2025 are 45%. Given these expectations, there is no doubt in my mind that the fed is going to pursue expansionary monetary policies before the end of the year. From an investment perspective, it’s therefore a good time to buy interest rate sensitive stocks for quick gains.
An important point to note is that rate cuts are intended to boost consumption and investment spending. It therefore translates into bullish momentum for industrial commodities and energy in anticipation of GDP growth acceleration. Further, with expansionary policies, the dollar weakens and precious metals trend higher. At the same time, higher liquidity in the financial system implies a flow of money into relatively risky asset classes.
With this overview, let’s talk about seven interest rate sensitive stocks that are positioned to trend higher on the first rate cut.
Newmont Corporation (NEM)
Newmont Corporation (NYSE:NEM) is an attractively valued gold miner that’s worth considering before the rate cut. It’s worth noting that gold has trended higher in 2024 and Citi expects the precious metal to trade at $3,000 an ounce in the next 6 to 18 months. With potential upside in gold, I expect a meaningful rally for NEM stock. I must add that the gold miner offers a healthy dividend yield of 2.1%.
From an asset perspective, Newmont has 128 million ounces of gold reserves and 155 million ounces in resources. With 10 tier one assets, Newmont has visibility to support steady production growth into 2040s.
Additionally, Newmont has an investment grade balance sheet and reported operating cash flow of $1.4 billion for Q2 2024. With the possibility of higher realized gold price, it’s likely that annual OCF will be in the range of $7 to $10 billion. This will position Newmont to increase dividends and the scale of share repurchase.
Chevron Corporation (CVX)
Chevron Corporation (NYSE:CVX) stock has remained depressed in the last 12 months with oil remaining subdued. However, I expect oil to trend higher and it’s a good time to accumulate CVX stock. Besides trading at attractive valuations, the stock also offers a healthy dividend yield of 4.55%.
The first positive to note is that Chevron has attractive breakeven assets. For Q2 2024, the oil & gas company reported operating cash flow of $6.3 billion. If oil trades near $100 per barrel, Chevron will be positioned to deliver annual OCF of $35 to $40 billion.
The second positive is that Chevron has an investment grade balance sheet. As of Q2 2024, the company reported net debt ratio of 10.7%. This provides flexibility to make aggressive investments. For the first half of 2024, Chevron reported capital investment of $8.1 billion. The company is on-track for annual investments in the range of $14 to $16 billion. This will ensure healthy reserve replacement and steady production growth.
Rio Tinto (RIO)
Among industrial commodity stocks, Rio Tinto (NYSE:RIO) looks undervalued at a forward P/E of 8.6. Further, RIO stock offers an attractive dividend yield of 6.9%. With rate cuts and possible stimulus, I expect industrial commodities to trend higher and Rio is positioned to benefit.
It’s important to note that even in a relatively subdued commodity price environment, Rio has reported robust cash flows. For the first half of 2024, the commodity company reported operating and free cash flow of $7 billion and $2.8 billion respectively.
While the iron ore segment remains the cash flow machine, Rio is also diversifying. The focus is on metals that are likely to support global energy transition. This includes aluminium, copper, titanium dioxide and lithium. Diversification is likely to create value in the next five years.
Overall, Rio Tinto has a strong balance sheet and robust cash flows. Dividends are sustainable and I expect continued value creation through share repurchase.
Coinbase Global (COIN)
Coinbase Global (NASDAQ:COIN) stock has witnessed a sharp correction of 16% in the last one month. This does not come as a surprise with Bitcoin (BTC-USD) declining. Further, Coinbase reported lower trading income in Q2 2024.
I however believe that the correction is a good buying opportunity and COIN stock is attractive at a forward P/E of 33. With rate cuts impending, it’s likely that Bitcoin will bounce back strongly. Further, if Donald Trump is elected as President, cryptocurrencies are likely to surge.
For Q2 2024, Coinbase reported revenue and EBITDA of $1.4 billion and $596 million. The first point to note is that even with relatively subdued trading income, EBITDA has been healthy. Once trading volumes increase, Coinbase will be positioned to deliver robust cash flows.
I must add that Coinbase has pursued aggressive geographic expansion in the last 12 to 18 months. This will yield results and with a cash buffer of $7.8 billion, the company is positioned to make big investments. I therefore expect accelerated growth and cash flow upside in the coming quarters.
Target Corporation (TGT)
The U.S. economy is primarily consumption based with retail spending being a key component of consumption expenditure. One of the objectives of lower interest rates is to trigger higher consumption spending and boost GDP growth. I am therefore positive on retailers with multiple rate cuts on the cards in the next 12 months.
Target Corporation (NYSE:TGT) stock has remained sideways in the last 12 months and looks attractive at a forward P/E of 14.3. I expect a strong breakout on potential rate cuts and as the holiday season approaches.
It’s worth noting that for Q1 2024, Target reported a 3.7% decline in comparable store sales. However, for the full year, the retailer has guided for 0% to 2% increase in comparable sales. The company is targeting to return to growth from Q2 and that’s a potential catalyst for stock upside. At the same tie, Target is looking at driving operational efficiency and boost margins. With positive fundamental developments, it’s likely that TGT stock will trend higher.
Tesla (TSLA)
Electric vehicle companies have faced multiple headwinds in the last 12 to 18 months. This includes decelerating global growth and intense competition. Another reason listed by the International Energy Agency is high interest rates that have an impact on the demand for EVs.
With a likely move towards lower cost of money, I believe that Tesla (NASDAQ:TSLA) is positioned to benefit. year-to-date, TSLA stock has corrected by 20% and I see this as a good buying opportunity.
It’s worth noting that Tesla is working on a new manufacturing process that’s likely to cut production cost by half. If the EV company is successful, it will be a big step towards the launch of low-cost cars. This is one potential catalyst for deliveries growth acceleration in the coming years.
Further, Cathie Wood believes that TSLA stock can surge 10-folds on Robotaxis. Even if this is an aggressive estimate, there is ample value creation that’s likely from self-driving cars. Therefore, with multiple positive catalysts, it’s a good time to accumulate the stock for the long term.
Barrick Gold (GOLD)
Let’s end the discussion on interest rate sensitive stocks with another quality gold miner. Barrick Gold (NYSE:GOLD) stock has remained sideways in the last 12 months and trades at a forward P/E of 13.8. Further, the stock offers a dividend yield of 2.3%. With the likelihood of gold remaining in an uptrend, I expect a big breakout rally for GOLD stock.
As an overview, Barrick Gold is the largest gold producer in the U.S. and the company has an investment grade credit rating. Besides this, Barrick also intends to double copper production from current levels by 2029.
For Q1 2024, Barrick Gold reported operating cash flow of $760 million. With the likelihood of gold trending higher, the company is positioned to report annual OCF of $4 to $5 billion. This will provide ample flexibility for dividend growth and increase in capital investments. Further, with quality tier one assets, there is steady production growth visibility for the coming years.
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.