The wait is over. Investors anticipated an interest rate cut by the Federal Reserve for months. Last week, the Fed ended the speculation with an exclamation point. It lowered the federal funds rate (the interest rates that banks charge each other) by 0.5% — twice the level many economists predicted.
That’s not the end of the story. The Fed expects more rate cuts this year and into 2025, with the federal funds rate projected to fall to 3.4% by the end of next year.
Investors understandably celebrated the Fed’s move. But which is the best stock to buy right now?
Many strong contenders
The great news for investors is that there are many strong contenders for the best stock to buy, with the Fed cutting interest rates. Lower rates help nearly every company. However, some sectors benefit more than others.
For example, real estate investment trusts (REITs) are especially sensitive to interest rates because they borrow heavily to buy additional properties. I’m a fan of two REIT stocks, in particular: Realty Income and National Storage Affiliates.
Consumer discretionary stocks, such as those of automakers, can also perform quite well in lower-rate environments. I expect lower rates to boost the fortunes of Honda Motor, which is dirt cheap, with shares trading at only 6.3 times forward earnings.
Utility stocks should benefit from lower interest rates, too. Like REITs, utilities often rely on debt to fund their growth. There are plenty of great utility stocks on the market. However, I’m largely partial to Dominion Energy because of its growth opportunity with data centers in Northern Virginia.
One stock that rises to the top
The residential construction industry should be another big winner with rate cuts. Thanks to the Federal Reserve’s recent move, mortgage rates have dropped to their lowest level since early 2023. With more interest rate cuts likely on the way, I expect mortgage rates to continue falling.
I like several residential construction stocks in the current environment. For example, D.R. Horton, the nation’s largest homebuilder, is a great pick. However, in my opinion, one stock in this group rises to the top: Lennar (NYSE: LEN).
Lennar ranks among the biggest homebuilders in the U.S. It also develops multifamily rental properties. Its financial services segment offers closing services, mortgage financing, and title services primarily to buyers of homes built by the company.
The stock has jumped close to 30% higher this year after soaring 64% in 2023. Despite these impressive gains, Lennar’s valuation remains very attractive with shares trading at only 11.5 times forward earnings. This multiple is lower than that of D.R. Horton and NVR, another big publicly traded homebuilder.
At the end of the second quarter of 2024, Lennar had a backlog of 16,944 homes with an aggregate value of $7.7 billion. The company’s balance sheet is solid, with a homebuilding debt-to-capital ratio of 7.6%.
Beyond rate cuts
Stuart Miller, Lennar’s executive chairman and co-CEO, said in the company’s Q2 earnings press release, “[W]e fully expect an even stronger, and more broad-based demand cycle as rates move lower. Lower rates and controlled inflation will likely boost confidence.”
I suspect Miller is right. However, I think there’s an even better reason to buy Lennar stock than the Fed’s rate cuts.
The U.S. continues to be plagued by a serious housing shortage. Estimates vary as to how severe this shortage is. Moody’s pegs the number at around 1.7 million homes. Fannie Mae and Zillow put the total at 4.4 million and 4.5 million, respectively. Whatever the actual number is, the ongoing housing shortage presents a tremendous long-term tailwind for Lennar.
It’s a big problem, but big problems create big opportunities. I see Lennar as one of the leaders in addressing the chronic U.S. housing shortage and a great stock to buy right now for long-term investors.
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Keith Speights has positions in Dominion Energy, Honda Motor, National Storage Affiliates Trust, and Realty Income. The Motley Fool has positions in and recommends Lennar, Moody’s, NVR, Realty Income, and Zillow Group. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
The Fed Is Cutting Interest Rates: Here’s the Best Stock to Buy Right Now was originally published by The Motley Fool
