All eyes are on the Federal Reserve this month as it gets ready to lower interest rates. Chairman Jerome Powell has alluded to being ready to make the cut when the Fed meets on Sept. 17, and a reduction of any level is likely to positively affect the stock market.
It should lead to improvements in spending, which will lift revenue at retailers and other companies across the country. That’s good for business overall, but it’s crucial for some companies that have been experiencing a serious downturn in sales.
Real estate is one industry that has been hurt severely by high interest rates. High mortgage rates mean homeowners aren’t looking for new digs, which means fewer houses on the resale market. Houses that are for sale come with a much higher price tag once you include the full price with the high mortgage rate, leading to even lower activity.
Beyond that, because people aren’t moving, home improvement stores are moving less inventory and less-expensive inventory.
It’s easy to see why lower interest rates could be a game changer for companies in the real estate industry. Opendoor Technologies (NASDAQ: OPEN) and Home Depot (NYSE: HD) are two great stocks that have been beaten down by short-term trends, but they should get back to growth in an economy with low interest rates, and their stocks should soar.
1. Opendoor: A digital home-buying experience
Digital technology has disrupted many sectors, and several tech companies are making a go of it in real estate. They offer real advantages over traditional real estate companies, such as the ability to screen thousands of properties in an area with instant details like size, images, and prices as well as comparisons with averages and medians.
Each of the real estate technology companies has its own spin on the concept and its own benefits. Opendoor is an iBuyer, which means it offers instant cash offers for your home, which it adds to its list of marketable properties.
Obviously, that kind of business needs a tremendous amount of capital to work, and other companies have exited this field due to the cash crunch and economics. Right now, it’s certainly weighing on Opendoor’s financial statements.
But the company also offers an online marketplace for searchers to find their next new home even without selling it to Opendoor, and it offers ancillary services to buyers and sellers as well. It aims to offer pretty much everything someone might need.
Although in most ways business has been miserable, investors know that progress is measured in growth and not absolutes. So, while revenue has been crushed and there are fewer houses for sale, there has actually been strong progress, which inspires confidence. Because as soon as rates go down and the real estate tide reverses, Opendoor will be in position to rebound.
For example, the company purchased 4,771 homes in the second quarter. Although that’s still down from 14,135 homes two years ago, it beat guidance by a wide margin and was up 78% year over year. The company sold 4,078 homes, down from 10,482 two years ago, resulting in revenue of $1.5 billion, just above the high end of guidance.
There was significant improvement in contribution profit; adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA); and adjusted net income.
Opendoor was growing well before the real estate industry got slammed, and it should get back there when things start improving. This isn’t a stock for the risk-averse investor, but it could be a fantastic stock over the long term.
2. Home Depot: A giant company plus a great dividend
Home Depot is in many ways the opposite of Opendoor. It’s a well-established giant in a secure retail sector, and it pays an excellent dividend. But the company is also feeling the pinch of the economy as customers stay home or pull back. It reported some of its best growth in years early in the pandemic, making it even harder to keep it up now.
Things haven’t been pretty recently, but Home Depot is a leader for a reason, and it’s been managing through this challenging time with strength. Comparable-store sales declined 3.3% from last year in the fiscal second quarter (ended July 28), but total sales inched up a drop for a slight rise.
Operating income decreased from $6.6 billion to $6.5 billion, and operating margin narrowed from 15.4% to 15.1%. Earnings per share (EPS) were down from $4.65 to $4.60, but they beat analyst expectations by $0.11.
Home Depot is in an excellent cash position with robust profitability, and it’s making key strategic moves to keep its leading position in home improvement. The company made several acquisitions recently such as landscape, pool, and roof company SRS Distribution, which gives it more niche products and can attract more pro business. It’s improving its in-store functionality with features such as computer vision tools to ensure on-shelf availability of products, and it’s well positioned to bounce back as soon as conditions permit.
Meanwhile, Home Depot stock pays a growing dividend that yields 2.46% at the current price. It’s an excellent all-weather stock that has outperformed the market over time and should soar when interest rates go down.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot and Opendoor Technologies. The Motley Fool has a disclosure policy.
Prediction: These 2 Stocks Will Soar If Interest Rates Are Cut This Month was originally published by The Motley Fool
