Whenever the Federal Reserve (the Fed) speaks, the whole market, the global financial market, watches closely. A single shift in sentiment and approach to where interest rates may be headed could send markets swinging in either direction, and that’s where investors can begin to look for opportunities. Today, three stocks were caught crashing hard after the Fed’s recent speech, and they are worth looking at.
In this group, it is stocks like Airbnb Inc. (NASDAQ: ABNB), The Hershey Co. (NYSE: HSY), and even Nike Inc. (NYSE: NKE) that traded down to potentially attractive levels for investors to start considering them for a watchlist. However, price action is only the starting filter for these investors to start their due diligence, as they should consider how what the Fed thinks can affect these businesses in the future.
What started as a proposal for four interest rate cuts beginning in March 2024, kickstarting the S&P 500 into a new all-time high, has now become a potential single rate cut as far back as November of this year, assuming no more changes and postponement is made. Here’s why the dip in these stocks is not truly justified.
Why the Fed's Postponed Rate Cuts Don't Impact These Stocks' Value
Keeping logic front and center, why would the value of these businesses need to swing by so much if half of 2024 has already gone through no interest rate cuts? Making a single rate cut, or potentially none, won't significantly affect the company's financials.
Despite all this, here's why these stocks may be attractive today. Airbnb stock trades at 85% of its 52-week high, even after reporting improving financials in the company's latest quarterly financials. Hershey's stock is now down to 71% of its 52-week high, unjustifiable for arguably the strongest candy brand in the consumer discretionary sector.
Last, Nike’s 76% of its 52-week high makes for a potential once-in-a-generation opportunity to watch Nike stock at today’s 24.6x forward P/E valuation, its lowest since 2018.
How Higher Rates Are Actually Boosting Airbnb Stock to New Levels
Because the average home price in the United States is now roughly 32% higher than it used to be before the COVID-19 pandemic, most would-be home buyers have now been priced out of the marketplace. Higher mortgage rates, around 7.3% today, have given the real estate sector another hit.
On the other hand, rental inflation is reported to be one of the most significant factors affecting the sticky inflation rate, which is why the Fed is staying away from interest rate cuts today. So, who else can they look to if people find it harder to buy and rent?
Airbnb’s long-term stays are one answer. Because these stays are already furnished and offer flexible rates and dates, people can use the service to cushion the rental and mortgage storm. The first quarter earnings results show this trend for Airbnb stock.
Long-term stays of three months or longer increased roughly 25% over the year, and that trend is expected to continue as long as the Fed keeps postponing these rate cuts. This is one reason why TD Cowen analysts see the stock going higher by 17.5% to $170 a share.
Investors Should Focus on Hershey's Return on Capital During Market Dips
According to the company’s financials, Hershey’s return on invested capital (ROIC) rates hover between 17% and 19% over time, one of the many reasons investors should watch the stock every time it takes a dip.
Why? Annual stock price performance tends to follow the long-term ROIC rate, meaning that today’s forward P/E ratio of 19.5x, the lowest since 2015 (ex. COVID), is one of the best opportunities for investors to consider in this stock.
Analysts at Argus think the stock is worth up to $225, daring it to rally by 20.5% from its current low. However, these analysts weren’t the only ones on Wall Street who found the stock attractive.
The Vanguard Group, Hershey’s largest shareholder, took advantage of this dip recently, boosting its position in the stock by 14.2% as of May 2024, bringing its net investment to $3.4 billion.
The Role of Nike's Global Presence in De-Risking Rate Cut Postponements
Even if investors are convinced that the Fed’s delay in rate cuts is terrible for already beaten-down stocks, here’s a perfect example of Nike’s global reach.
Because the brand has significantly penetrated global markets, its revenue streams are diversified away from the U.S. retail sector. Even if there are zero rate cuts this year, Nike can still count on European and Asian markets to compensate for the North American headwind.
Still, even with higher interest rates, Nike’s most recent quarterly earnings results show a rise of 3% in net North American revenues. Because of this ability to cushion the cycle, analysts at Robert W. Baird see a price target of $125 a share, or 33.5% higher than today’s compressed prices.
That is also why Lazard Asset Management decided to boost its stake in Nike stock by 7.9% as of May 2024, bringing the investment firm’s net investment in Nike stock up to $300.8 million today.
