Interest rates are finally coming down. Here are 3 ready-to-fly stocks.

On September 18, the Federal Reserve voted to cut interest rates for the first time in four years. There are certain stocks that can benefit from this move.

But first, I should temper expectations. To begin with, investors should not get too hung up on interest rates as they are not predictable. Even voting members of the Federal Reserve are often wrong when it comes to forecasting interest rates a year in advance. Most people will have no more information than the Federal Reserve itself. Therefore, predicting where interest rates will be in a year or two is nothing but a coin.

Moreover, interest rates cannot fix a bad business. Because of this, investors still need to work hard to identify strong secular trends and good business in these spaces.

That said, there are solid businesses that can benefit from the recent rate cut. I believe too Flooring and decor (FND 1.47%), Led brands (DRVN -2.39%)and Tangier (SKT 1.38%) there are three such businesses.

1. Flooring and decor

Floor & Decor owns and operates large warehouse-style home improvement stores, not unlike Home Depot. But instead of stocking their locations with general home improvement merchandise, the company mainly stocks items like tile, hardwood and other items needed to install flooring. It’s a big market, and Floor & Decor is niche enough to carve out its place in the space.

At the end of 2020, Floor & Decor had only 133 locations. But as of the second quarter of 2024, the company already had 230 locations and expects to open more than 20 before the end of the year. Opening new locations at this rate allowed it to quickly grow both its top and bottom lines.

FND Revenue (TTM) data by YCharts

Targeting 500 locations by the end of the decade, there could be plenty of growth ahead for the Floor & Decor business, which could propel the stock to strong earnings.

However, sales have been down recently for Floor & Decor — a common problem among home improvement retailers. Remodeling activity tends to slow when interest rates are high because people are less inclined to move or close a home equity line of credit. But now that rates are falling, it could revive a sluggish home improvement industry to the benefit of Floor & Decor shareholders.

2. Led brands

In my view, things would have to get pretty bad with the economy before most people give up washing their cars and changing their engine oil — these things are done regularly. And that ensures stable business for Driven Brands, given that it has more than 1,800 maintenance shops and more than 1,100 car washes, as well as other services in the automotive space.

Driven Brands’ main flaw is that it has a lot of debt — about $2.9 billion in the second quarter of 2024. That’s a lot, considering it only generated $2.3 billion in revenue over the past 12 months. And when interest rates have risen in recent years, so have interest payments.

DRVN Net Interest Income (TTM) data by YCharts

Now that the Federal Reserve is lowering interest rates again, Driven Brands should enjoy a measure of relief when it comes to servicing its debt.

Driven Brands is an otherwise profitable business. Earnings before interest, taxes, depreciation and amortization (EBITDA) adjusts for debt service expenses. The company earned $283 million in adjusted EBITDA in the first half of 2024, with its main car wash and maintenance business segments also making a stand-alone profit.

Management for Driven Brands is targeting at least $535 million in adjusted EBITDA in 2024 — it’s already more than halfway there. And with a current enterprise value of just $5.2 billion, it’s a cheap stock today at less than 10 times this year’s adjusted EBITDA.

3. Tangier

Tanger is a small real estate investment trust (REIT) of 38 malls starting in the second quarter of 2024. One of the main things to watch here is the occupancy level. It would be problematic if tenants went bad and broke their leases. But since Q2, occupancy is strong at over 96%.

This stock benefits from lower interest rates any time. As a REIT, Tanger must distribute a certain amount of profit to shareholders as a dividend. And it is common for it to have a high dividend yield.

To be clear, there are several things that can affect the dividend yield. But one of those factors is interest rates.

When rates are high, dividend stocks like Tanger are not in as much demand because investors can get good guaranteed returns from bonds. There is no point in taking as much risk with a stock. This can cause the prices of dividend stocks to fall until the dividend yield is high enough to justify the additional risk of investing in a stock rather than a bond. But this reverses when rates fall – the yield on a stock REIT like Tanger becomes more attractive.

It may already be too late to point out the benefits of Tanger stock. It’s up more than 40% over the past year, in part because investors likely anticipated the upcoming rate change and wanted to lock in the Tangier dividend at a higher yield — after all, occupancy levels are strong, so there’s reason reliable in the business. . But its 3.5% dividend yield is still attractive, and the share price could rise further with future rate cuts, which are on the table.

More than just interest rate cuts

In closing, I want to reiterate a point I made at the beginning: investors should not build an entire investment thesis on interest rates – investors cannot predict what rates will do, and changes in rates will not make a company great bad . But I think Floor & Decor, Driven Brands and Tanger are good businesses first and foremost. And these good businesses get an added benefit from lower rates, which is why we’ve highlighted this trio here.