Interest rates act as a driver (or sometimes a detriment) to the performance of a stock. On July 31, the Fed cut interest rates for the first time since the financial crisis. However, those looking for cheap stocks to buy faced only disappointment, at least for now. Interestingly, the rate cut didn’t lead to stock buying, but a stock selloff in Wednesday trading.
Despite that short-term reaction, the first rate cut since the financial crisis should lower interest costs across the board. Also, depending on a company’s offering, lower rates can change the value proposition on many products. Further, this will likely improve corporate balance sheets, many which hold dangerous levels of debt.
As a result of debt, many equities have become cheap stocks to buy. With lower interest costs, some could gain the catalyst necessary to send stock prices higher. These five stocks to buy could see such gains.
AT&T (NYSE:T) has become one of the cheap stocks to buy that is safe and dangerous at the same time. The company owns one of three nationwide 5G networks. Several of the latest technological advances such as artificial intelligence (AI), virtual reality (VR), and the Internet of Things (IoT) will not advance as quickly as 5G. This will put AT&T along with Verizon (NYSE:VZ) and T-Mobile (NASDAQ:TMUS)
However, unlike its peers, T also invested heavily in a content strategy through ownership of DirecTV and WarnerMedia. The content strategy helped to leave AT&T with the largest long-term debt load among its peers. These obligations stood at almost $164 billion as of the end of the first quarter. That leaves debt levels nearly as high as the company book value of just over $185.1 billion.
However, lower rates can help lower interest costs, thus increasing their profit. It also makes capital more accessible as it continues to spend on 5G buildouts.
Further, the company maintains a 34-year streak of dividend increases. Despite a yield of around 6%, ending the streak would devastate T stock despite a modest 9.3 forward price-to-earnings (PE) ratio. The lower borrowing costs ease the burden of this dividend. A lower debt burden could lead to more buying of AT&T as investors begin again to believe in the company.
Real estate gets a lot of attention after a rate cut, but often forgotten are stocks like Caterpillar (NYSE:CAT), whose equipment plays a crucial role in building construction. Nonetheless, Caterpillar has not only suffered from slowing real estate sales, but the uncertainty brought about by the U.S.-China trade war. Moreover, CAT stock actually dropped after the Fed announced its interest rate cut.
Before earnings, I warned investors that CAT stock only made sense for dividend-oriented investors. Shareholders have long benefited from a rising dividend, and nothing on the horizon looks like a threat to this payout.
However, the lower price makes it an even better buy for income-focused investors. Thanks to the lower share price, CAT stock now yields 3.25%.
Also, I mentioned that CAT had recovered from the $120 per share level three times. This current pullback has taken it to about $124 per share as of the time of this writing. That could indicate a limited downside.
Further, I list CAT as one of the cheap stocks to buy by virtue of the forward PE ratio which has fallen below 10. Even with lowered guidance, analysts expect 5.3% profit growth. Even if the stock took time to recover, investors would collect a generous dividend while they wait. If the rate cut helps it bounce off the $120 per share price flow, it could make CAT stock an income and growth play again.
Chesapeake Energy (CHK)
Chesapeake Energy (NYSE:CHK) stock is among the cheap stocks to buy for a very good reason. The company maintains a market cap of around $2.7 billion even as it faces debt levels that stood at about $9.17 billion at the end of the first quarter. This debt rose when it purchased Wildhorse Resource Development so the natural gas company could increase its exposure to oil.
Such debt levels make it a risky play. However, the company had returned to profitability before acquiring Wildhorse. The ability to refinance some of this debt at lower rates should ease the burden.
Moreover, rising demand for oil should mean that Chesapeake can sell its oil and natural gas at higher prices, thus increasing profits. Furthermore, Chesapeake has steadily sold off assets to pay some of the debt off. Higher energy prices also make those properties easier to sell.
Lower debt costs also provide lower borrowing costs for an industry CHK stock needs to drive its future, the natural gas export industry. Lower rates should facilitate the construction of planned natural gas facilities, thus further enabling Chesapeake to sell its product in Europe and Asia where natural gas sells for higher prices.
Despite improving prospects, investors should still treat CHK stock as a speculative play. However, the odds of paying off debt and earnings profits dramatically increase in an environment of lower rates.
Lennar Corporation (LEN)
Lennar (NYSE:LEN) brought in more revenue than its peers last year. However, its industry has begun to suffer as home sales have become flat. Interest rates have long served as an essential component of the real estate industry. These flat real estate prices likely helped influence the rate cut.
Still, lower interest rates put home affordability within reach, and this should help sales and LEN stock. Due to the slower market in 2019, analysts forecast a 2% drop in profits for this year. However, they expect that growth will reach 8.8% this year. They also predict earnings increases averaging 9.45% per year over the next five years.
With a forward PE ratio of around 8.2, we can easily classify LEN as one of the cheap stocks to buy in this industry. Further, with profit growth poised to reach almost 10% per year, such a valuation might give investors a reason to buy.
LEN stock currently trades at around $49 per share. The home-buying spree in both the current and the last decade took Lennar above $60 per share before it fell back. It may take more than one interest rate cut for LEN to finally achieve a new all-time high. However, with profit growth set to resume, LEN stock looks set to return to historic highs.
Newmont Goldcorp Corporation (NEM)
Early this year, Newmont Mining merged with Goldcorp to form Newmont Goldcorp (NYSE:NEM). The company suffered for years as falling gold prices sent NEM stock tumbling early in the decade. Today, it trades at a little bit more than half of its 2011 peak.
However, gold prices have sustained themselves above the $1,400 per oz. in recent weeks as falling market interest rates and a rate cut have propelled investors back into gold. At just above $1,440 per oz., gold trades as its highest level since 2013.
Currently, NEM stock trades at about 22.6 times forward earnings. That may not make it one of the more ideal cheap stocks to buy. An 8.2% profit decline expected for the year also does not help. However, analysts expect the benefits of higher gold prices to show up in profit forecasts soon. For 2020, Wall Street predicts that earnings will increase by 44.7%.
The effects have yet to reach NEM stock. NEM has traded in a range since 2016. At $37 per share, it sells well above the $29-plus per share lows seen in this range. The critical points come at its 52-week high of $40.33 per share and its 2016 high of $46.27 per share. If it can break through both highs, Newmont Goldcorp could begin to enjoy the multi-year highs now bolstering the price of gold.
As of this writing, Will Healy is long CHK stock. You can follow Will on Twitter at @HealyWriting.
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