The best low rate stocks to invest $1,000 in right now

The Federal Reserve recently announced a 50 basis point cut in the US economy’s benchmark interest rate to kick off what should be an easing cycle in which interest rates across the economy fall. The Fed has raised interest rates in 2022 to combat rampant inflation.

Rate changes affect consumers, businesses and almost every other part of the economy. Companies that borrow or lend money are particularly sensitive, so a rate cut is a big deal for a digital bank like SoFi technologies (SOPHIE -2.93%). The stock has disappointed investors over the past few years, but SoFi could be a big winner in this new lower-rate economy.

Here’s why investing $1,000 in fintech stocks today could yield significant returns.

First, how do banks make money?

SoFi is a digital bank that provides financial services and loans to consumers. Does not operate brick and mortar branches; customers can use the SoFi website or smartphone app to do their banking. However, as with all banks, interest rates directly affect the business.

Essentially, banking is a two-part business:

1. Banks pay interest on the money people deposit. That’s how they attract customers.
2. Banks take your money and lend it out. That’s how they make money.

A bank wants to earn more on loans than it pays on its deposits. The difference is called a bank’s net interest income. This money then covers the bank’s general and operating expenses to become its bottom line. Banks can generate service and fee income, but net interest income is the key to banking.

Why SoFi benefits from lower rates

Technically, higher rates can make bank loans more profitable. About 82% of SoFi’s loan income was net interest income in the second quarter, a record high.

However, this is not all it is cracked up to be. Remember: the purpose of rate hikes is to slow the economy, and debt is the oxygen that fuels it. Higher interest rates make debt more expensive, so fewer people take out loans.

Lower rates make it easier to borrow more. While SoFi’s net interest income on loans could decline as rates fall, income from increased lending activity should more than offset that.

CEO Anthony Noto pointed out in the second-quarter earnings call that a lower benchmark rate will help his business, primarily by boosting volumes in its home loan, purchase loan, home equity and mortgage businesses. existing funding.

SoFi started in student loans and is a major player in refinancing. Higher rates have suppressed that part of its business — it originated $4.3 billion in student loans in 2021, but only $2.6 billion last year. This should come back in a big way as rates come down.

More loans and more customers should grow SoFi

SoFi has grown its customer base so well in recent years that the company has still managed excellent growth despite high rates:

SOFI Revenue (TTM), data by YCharts; TTM = last 12 months.

At the end of 2021, SoFi had 3.46 million members. This has grown to 8.77 million in just two and a half years. Customer growth was 41% year-over-year in the second quarter, so there’s no evidence this will slow. Not only should lending activity pick up, but SoFi also has a much larger customer base. It sets the stage for stellar growth from above and below.

However, the stock is still trading at a fraction of its all-time high. But you shouldn’t let past price action tell the SoFi story. We previously discussed fintech going public during a stock market bubble. As you can see, the rise and fall of the share price has gradually brought the company’s valuation (as reflected in price-to-book value) in line with other banks:

SOFI price at tangible book value; data through diagrams

SoFi is not a well-known megabank JPMorgan Chase or Bank of Americabut it grows much faster. With the stock finally trading at a bank valuation, SoFi’s meteoric rise should translate into investment returns. Owning the stock has been a nightmare for the past few years, but it could be on the verge of delivering market returns that most investors dream of.