3 Stocks to Buy if You’re Betting on a Soft Landing
The debate continues.
Proponents of the soft-landing scenario believe that U.S. economic growth will slow but remain meaningfully positive. At the same time, the adherents of this theory think inflation will continue to ease, enabling the Federal Reserve to meaningfully cut interest rates in 2024.
So far, the chances of materializing appear to be quite high, as the Fed expects the economy to grow at a fairly robust, seasonally adjusted annual rate, above inflation, of 2.1% in the current quarter. Meanwhile, inflation is generally heading downwards. The significant decrease in oil prices should push prices further south. Most companies will benefit from a combination of continued, strong growth and lower interest rates.
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Let’s explore three such stocks to buy for a soft landing.
Bank of America (BAC)
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As of the end of the third quarter, Bank of America (NYSE:BAC) had unrealized losses on its bonds of $131.6 billion. That’s a huge paper loss, and the situation has been weighing tremendously on BAC stock. In fact, the shares have tumbled 16% already this year and 26% in the last 12 months amid worries about the bank’s bond portfolio.
Bond prices move inversely to their yields. Therefore, a soft-landing scenario that allows the Fed to cut interest rates would probably cause the value of BAC’s bonds to surge. Thus, BAC stock would rally.
Currently, BAC’s shares are trading at a substantially low forward P/E ratio of 8.3, largely due to the paper losses of its bonds. As a result, the shares will likely pop a great deal if the bank’s bonds rise.
General Motors (GM)
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The current, elevated interest rate environment is negative for General Motors (NYSE:GM). And high interest rates make vehicle purchases more expensive for the vast majority of consumers who seek auto loans.
In fact, high rates are a key reason GM stock is changing hands at a truly tiny forward P/E ratio of 4. Even at the end of 2022, at a point when the stock market was struggling mightily, GM’s forward P/E ratio was 5.5, meaningfully above the current level.
Notably on Nov. 1, British bank Barclays raised its rating on GM stock top overweight from equal weight. They cite the stock’s low valuation and the resolution of the United Auto Workers’ strike against it. The bank kept a $37 price target on the shares.
PulteGroup (PHM)
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Homebuilder company PulteGroup (NYSE:PHM) has a vast majority of its customers take out huge loans to buy its homes. Not surprisingly, the high interest rates are weighing tremendously on Pulte’s top and bottom lines.
Moreover, the elevated rates are keeping the valuation of PHM stock quite low, as its forward P/E ratio sits at 7.8.
To reiterate, a soft landing would allow the Fed to cut interest rates, making homes more affordable and allowing Pulte to sell more of its homes. Additionally, investors would become much more upbeat on Pulte’s outlook causing the stock’s valuation to surge.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been PLUG, XOM and solar stocks. You can reach him on Stocktwits at @larryramer.
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