2 stocks that could be big winners from the Fed’s rate cuts

The Federal Reserve recently cut interest rates by 50 basis points, the first cut in the benchmark federal funds rate since early 2020. This not only had the obvious effects of making it cheaper for businesses to borrow money, but also increased the probability of an economy. soft landing (avoiding a recession).

In addition, this will be the first in a prolonged series of interest rate cuts over the next two years. In fact, members of the Federal Reserve recently projected an additional 150 basis points (1.5 percentage points) of tapering by the end of 2025.

Some companies could be big winners from the Fed’s rate cuts, especially if a recession can be avoided and the economy kept strong. Here are two stocks in particular that look interesting from a long-term perspective at their current prices.

A soft landing could have a big impact on travel demand

at a glance Airbnbhis (ABNB 1.90%) recent results seem strong. In the second quarter, the travel disruptor beat expectations on both the top and bottom lines. The deal generated $1 billion in free cash flow, strong booking volume growth and more. However, the company’s guidance spooked investors and the stock fell sharply.

Specifically, Airbnb reported that at the start of Q3, the business saw a “sequential moderation” in booking volume; in other words, there is a slowdown. And the company specifically announced “signs of slowing demand from US guests.”

However, it is important to note that the company said all this before the latest inflation and economic data before the Fed cuts interest rates and before the latest economic forecasts are released. A soft economic landing could certainly lead to better-than-expected travel demand, and lower interest rates could boost consumer confidence.

Of course, the bearish environment is negative for Airbnb in some ways. For example, the company has more than $11 billion in cash on hand, in addition to the more than $10 billion it holds on behalf of hosts, and falling rates mean less interest income. But a falling rate environment should generally be a positive catalyst, and Airbnb could be worth a look while it’s 25% below recent highs.

A great opportunity and more ability to pursue it

It’s no big secret that real estate investment trusts, or REITs, are very sensitive to rising interest rates. In fact, during the peak of the rate hike cycle in 2022 and into 2023, housing was the worst performing sector in the stock market. And as rates fall, it could create an overall tailwind for the sector.

One in particular to keep an eye on is EPR properties (EPR 0.41%)which specializes in experiential real estate. The company aims to reduce its exposure to the uncertainty of movie properties (currently its largest property type) and sees an affordable $100 billion opportunity to acquire properties such as water parks, ski resorts, food and entertainment businesses , accommodation experience and much more.

EPR had a strong balance sheet and plenty of cash, but over the past year or so, debt-to-equity covenants have effectively prevented the company from using its $1 billion line of credit (not to mention that high interest rates of loans have made it unattractive to take on new debts). But recently, EPR entered into a new $1 billion credit facility that, among other things, “amends the secured debt to total asset value to allow the company to incur additional secured debt if it so chooses.”

In other words, EPR now has a line of credit that it can actually use, and falling interest rates will gradually make borrowing more attractive. This combination could help the company seize many more opportunities in the years to come.

Two great opportunities for patient investors

Neither of these are low-risk businesses, but both look like interesting long-term investment opportunities right now. Both are trading well below their highs and have some clear tailwinds from the expected rate-decline environment, and both look well-positioned to deliver total market returns in the coming years.