Three Stocks That Can Rise if the Fed Starts Cutting Rates in 2024
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Three Stocks That Can Rise if the Fed Starts Cutting Rates in 2024

If suppressive fed hiking burden is lifted, debt financing is alleviated as well.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

Since the Federal Open Market Committee (FOMC) held on November 1st, there has been a shift in interest rate expectations. Current fed fund futures, which speculate on the direction of the federal funds rate, price in additional hikes at a probability under 1.5%, per CME FedWatch. 

The first rate cut is not expected until May 2024, at a 75% probability. This mirrors Fed Chair Jerome Powell’s stance that the central bank will go into restrictive pause mode until “inflation returns to the Committee’s 2% objective”.

In addition to disinflation expectations, a push in the rate cut direction comes in the form of massive net interest payments, skyrocketing to $981.3 billion in Q3. Much of the country’s economic output is siphoned into debt service instead of productive growth. 

Looking at that probable rate-cutting horizon in H2 2024, which stocks are poised to rebound? After all, if higher borrowing costs have a suppressive effect now, this translates to discount territory before rate cuts commence.

Peloton Interactive, Inc. (NASDAQ: PTON)

Peloton offers consumers fitness equipment, subscriptions to on-demand classes, and e-commerce for fitness apparel. Embracing the digital era, the company even started creating virtual spaces for internet-connected Peloton Bike and Tread.

Over the last three years, PTON stock has fallen nearly 80% since January 2020. At its peak, PTON shares were priced at $162 in December ‘20 vs the current price of $5.90. Viewed as a disruptive growth company, Peloton relies on debt to fuel that growth, negatively impacted by the high interest rate environment. 

In 2022, the company raised $750 million more debt to bolster its balance sheet. This was later disrupted by the Bike seat recall and subsequent 15 – 20% drop in subscriptions. By its nature, the demand for Peloton services is seasonal, which placed the selloff pressure.

On the upside, the company is fully integrated into the environmental, social and governance (ESG) framework, per the latest October report. This makes it more likely to power through the downturn with easier access to debt financing. Although still at a net loss, per the latest Q1 ‘24 earnings report, Peloton has gradually decreased it from $408.5 million a year ago to $159.3 million. 

Based on 24 analyst inputs pulled by Nasdaq, PTON stock is a “buy.” The average PTON price target is $7.54 vs the current $5.90. The high estimate is $20, while the low forecast is $4 per share.

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Upstart Holdings, Inc. (NASDAQ: UPST)

Upstart Holdings is a novel take on FinTech with a heavy emphasis on AI. The company trained its AI model to seek non-traditional factors for creditworthiness, which are then used to connect financial institutions and consumers. In this intermediary position, Upstart generates revenue through platform fees, referral fees, and service fees for lenders. 

Although Upstart’s AI-powered loan marketplace is largely automated, the company had to cut 20% of personnel at the beginning of the year. This is concurrent with the consumer spending slowdown and loan delinquencies

In the Q3 earnings report, Upstart reported a 14% YoY total revenue decrease and an 18% YoY fee revenue decrease. Looking at the post-high interest rate environment, Upstart should leverage its impressive 88% fully automated unsecured loans milestone. This is a drastic improvement from 29% in Q2 2017.

“That means instant and automated approval with no waiting, no documents to upload and no phone calls.”

Dave Girouard, Upstart CEO in August ‘23

Based on 14 analyst inputs pulled by Nasdaq, UPST stock is “hold” translating to fair valuation during the restrictive Fed pause. The average UPST price target is $22.9 vs. the current price of $27.54. The high estimate is $36, while the low forecast is $9 per share.

Netflix, Inc. (NFLX)

Netflix exemplifies the transition from old media to digital, subscription-based distribution. In that capacity, this high-growth company incurred $27.4 billion in liabilities as of the end of September. 

Yet, Netflix managed to decrease its debt-to-equity ratio from 1.47 in December 2020 to 0.64 in September 2023. At the same time, Netflix steadily increased its revenue and subscriber count. In the Q3 earnings report, the company’s average paid memberships yielded a 9% YoY increase, at 8.8 million paid net additions vs 2.4 million in Q3 2022. 

Cornering the market and becoming synonymous with online entertainment, NFLX is up 61% year-to-date despite a high interest rate environment. This leaves much room for appreciation under the expected rate-cutting regime.

Based on 42 analyst inputs pulled by Nasdaq, NFLX stock is a “strong buy.” The average NFLX price target is $465.97 vs the current $477. The high estimate is $600, while the low forecast is $325 per share.

Do you think market liquidity will shift positively with rate cuts, or will the USG use this opportunity to tighten it up via repos and money market funds (MMFs)? Let us know in the comments below.