Interest rates are falling. 3 Top Stocks to Buy Right Now

After several years of keeping interest rates high to control inflation, the Federal Reserve finally reversed the levers on Wednesday.

The central bank surprised some investors by opting for a 50 basis point cut, lowering the federal funds rate by 4.75% to 5%. The move should provide a welcome boost to the economy, even as major stock indexes gave up initial gains by the end of the day’s session.

Still, lower interest rates are clearly a plus for a number of stocks. Let’s take a look at three that are poised to win with lower interest rates.

1. Home Depot

Probably the biggest impact of the interest rate cut is that it will lower mortgage rates and the cost of borrowing for homeowners. That means it’s likely to give a much-needed spark to the struggling housing market and, as rates fall, encourage refinancing and borrowing through home equity loans and lines of credit (HELOCs).

In fact, there is already some evidence that demand for HELOCs, which are typically variable rate loans, is increasing in anticipation of lower interest rates. Plus, homeowners have more equity to draw on now, thanks to the lock-in effect of high mortgage rates over the past few years.

All this is good news for Home Depot (NYSE: HD)the nation’s largest home improvement retailer. Home Depot has struggled in recent years after a pandemic boom in home improvement spending gave way to a slump as mortgage rates rose.

Business is cyclical, and lower rates should boost spending on home improvements. Home Depot also has even more firepower after its acquisition of SRS Distribution earlier this year, which significantly increased its exposure to the building materials distribution sector, serving professional contractors and tradespeople.

Home Depot’s business is still experiencing comparable sales of 3.3% in the second quarter, but with rates expected to continue to decline, don’t be surprised if the company’s business and stock rise in the peak season of improvement of housing next spring.

2. Carnival Corp.

Carnival Corp. (NYSE: CCL)the world’s largest cruise line operator, is a good example of a stock that is well-positioned to take advantage of lower interest rates.

Carnival should benefit in two ways. First, lower rates will lower interest payments on its large debt balance and possibly give the company a chance to refinance its fixed-rate debt.

The company had to go into deep debt to survive the pandemic and ended the second quarter with $29.3 billion in debt, which cost it $450 million in interest in the quarter, or $1.8 billion of dollars annually. That equates to an average interest rate of 6.1 percent, and interest expenses ate up nearly all of the company’s $560 million in operating income in the quarter.

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Even if Carnival reduced its average interest rate by 1 percentage point, it would save $180 million a year in interest expense.

The other reason Carnival should benefit from lower interest rates is that it should boost the economy and consumer spending by helping the job market, making it easier for businesses to borrow and lower costs for consumers, giving them more money to spend on activities discretion. such as travel.

Like Home Depot, Carnival operates in a cyclical industry, meaning the business tends to do better in a healthy and expanding economy.

3. Upstart

finally, upstart (NASDAQ: UPST) is another strong candidate to benefit from lower interest rates. As a consumer lending platform, Upstart has more exposure to interest rates than almost any other stock, and its volatile track record shows it.

The stock has soared in 2021 as the company’s revenue grew by triple digits and it generated strong profit margins. However, that boom was driven by stimulus money and the pandemic economy and dried up as interest rates rose and credit standards tightened.

With interest rates falling, this pullback should boost demand for Upstart loans and loosen lending standards.

Business also seems to have improved in the meantime. Its most recent loan originations are expected to generate gross returns of 14%. The Macro Start Index is falling, meaning the macro economy is less likely to trigger a default. Ninety-one percent of its loans are instantly approved and fully automated, and it has expanded its HELOC product to 30 states and the District of Columbia.

Management did not factor rate cuts into its guidance, but chief financial officer Sanjay Datta said: “The rate cut is unequivocally good for the business” and added that high rates were “the main drag on our business.”

It’s unclear what the exact impact of the lower rates will be, but Datta predicted that conversion rates, or the percentage of successful loan applications on the company’s platform, will increase with each cut from the Fed. It might take a few quarters for that to play out in the numbers, but Upstart stock could rise if the company starts showing flashes in 2021.

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Jeremy Bowman has positions in Upstart. The Motley Fool has positions in and recommends Home Depot and Upstart. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.

Interest rates are falling. 3 Top Stocks to Buy Right Now was originally published by The Motley Fool