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THE TOP STOCKS TO OWN AS INTEREST RATES FALL

Written by Marc Lichtenfeld

Tuesday, September 17, 2024

The Federal Reserve will almost certainly lower interest rates tomorrow – even
though I argued vehemently against it last week. (Like my children, the Fed will
probably ignore my sage advice.)

So, if we do enter a rate-cutting environment, what stocks are likely to do
well?

Here are the top three sectors I expect to outperform during this new era.

1. Real Estate Investment Trusts

Real estate investment trusts, or REITs, are companies that buy real estate
properties and rent them out to tenants. But these businesses don’t just buy
houses or offices. They also own retail centers, healthcare facilities… even
shelf space in data centers.

A stock that I’ve held in the Oxford Income Letter portfolio for a long time –
and that I still recommend – is Four Corners Property Trust (NYSE: FCPT).

A former spinoff from Darden Restaurants (NYSE: DRI), Four Corners owns a ton of
restaurant real estate, much of which it leases to Darden eateries. However, the
company has expanded significantly in recent years, now holding properties in
auto service, medical retail, and other retail as well.

Four Corners’ adjusted funds from operations, which is the measure of cash flow
used by REITs, has been steadily rising, enabling the company to hike its
dividend for seven years in a row. The stock now pays a 4.6% (and growing)
yield.

2. Homebuilders

There are not enough houses to meet demand in the U.S. The shortfall is
staggering. It is estimated that we would need 7 million new homes in order to
catch up with demand.

And demand could soon increase even more. As interest rates fall, mortgages will
become more affordable. If the 30-year fixed rate mortgage (which is currently
averaging about 6.3% nationwide) dips below 6%, I believe we’ll see a rush of
new homebuyers – especially if Vice President Kamala Harris wins the presidency.

One of Harris’ campaign promises is a $25,000 subsidy to assist new homebuyers
with their down payments and make homeownership more affordable.

So demand is set to increase strongly, while supply is still tight.

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I particularly like homebuilders that are catering to first-time buyers, as
first-time buyers will likely be the most ready to make the leap to a new home
in the coming year.

Century Communities (NYSE: CCS) focuses on the entry-level market. In the
company’s own words, this allows it to “target the broadest potential pool of
customers.”

Century had a down year in 2023, which is not entirely surprising given that
interest rates were rising throughout the past two years. This year, however,
the company’s numbers have rebounded.

Revenue in the first half of the year grew by 24% over last year, while earnings
grew 75%. Wall Street predicts robust 15% earnings growth in 2025.

The stock trades at just 10 times earnings – well below the sector median of
14.6.

It also pays a small dividend.

3. Utilities

Utilities tend to perform well when rates fall. This is because they borrow a
lot of money, and falling rates mean lower interest expenses.

The chart below shows the inverse relationship between interest rates (as
measured by the 10-year Treasury yield) and the performance of the S&P 500
Utilities index.



Utilities’ strong dividend yields also become more appealing as rates decline,
because low rates make it more difficult to find meaningful yields elsewhere.

Duke Energy (NYSE: DUK) is based in North Carolina and delivers power to 8.4
million customers in seven states. It has one of the largest electricity
transmission systems in the country.

Excluding the pandemic year of 2020, revenue has been steadily growing since
2018. This year, profits are on pace to be the highest they’ve been in at least
a decade.

This is a very well-run company that sports a 3.5% yield.

Generally speaking, falling rates are good for the stock market, and I expect
these sectors and individual stocks to do particularly well.

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