All eyes will be on the Federal Reserve this month, as it prepares to cut interest rates. Chairman Jerome Powell has hinted that he’s ready to implement the cuts when the Fed meets on September 17, and a cut of any size would likely have a positive effect on the stock market.
It should lead to improvements in spending, which will boost revenues for retailers and other businesses across the country. That’s good for business overall, but it’s critical for some businesses that have seen a severe drop in sales.
Real estate is an industry that has been hit hard by high interest rates. High mortgage rates mean that homeowners are not looking for new homes, which means that there are fewer homes on the resale market. Homes that are for sale have a much higher price tag when you add the full price to the high mortgage rates, which leads to even less activity.
In addition, DIY stores move less and the stock is also cheaper, because people do not move.
It’s not hard to see why lower interest rates could be a game changer for companies in the real estate sector. Opendoor technologies (NASDAQ: OPEN) And Home Depot (NYSE: HD) are two great stocks that have suffered from short-term trends. But in a low-interest-rate economy, they should grow again, and their stocks should skyrocket.
1. Opendoor: a digital home buying experience
Digital technology has disrupted many industries, and several tech companies are making a success 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 such as size, images and prices, as well as comparisons to averages and medians.
Each of the real estate technology companies has its own spin on the concept and its own advantages. Opendoor is an iBuyer, meaning it offers instant cash offers for your home, adding to its list of tradable properties.
Obviously, these types of businesses require a huge amount of capital to operate, and other businesses have gotten out of this space because of the money crunch and the economy. Right now, it’s definitely weighing on Opendoor’s financial statements.
But the company also provides an online marketplace for searchers to find their next new home, even without selling it to Opendoor, and it also offers additional services to buyers and sellers. It aims to provide just about everything anyone could possibly need.
While things have been miserable in most respects, investors know that progress is measured in growth, not absolute numbers. So while revenues have been crushed and there are fewer homes for sale, there has actually been strong progress, which inspires confidence. Because once rates come down and the real estate tide turns, Opendoor will be able to recover.
For example, the company bought 4,771 homes in the second quarter. While that was still down from the 14,135 homes it bought two years ago, it far exceeded guidance and was up 78% from last year. The company sold 4,078 homes, down from the 10,482 it sold two years ago, resulting in $1.5 billion in revenue, just above the high end of its guidance.
There was a significant improvement in contribution profit, adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) and adjusted net profit.
Opendoor was growing long before the real estate industry took a hit, and it should grow again when things pick up. This is not a stock for the risk-averse investor, but it could be a fantastic stock in the long run.
2. Home Depot: A Huge Company Plus a Big Dividend
Home Depot is in many ways the opposite of Opendoor. It’s an established giant in a safe retail sector, and it pays an excellent dividend. But it’s also feeling the pressure of the economy as customers stay home or retreat. It reported some of its best growth in years early in the pandemic, making it even harder to sustain now.
Things haven’t been great lately, but Home Depot is a leader for a reason, and it’s weathered this challenging time with strength. Comparable store sales fell 3.3% from a year ago in the fiscal second quarter (ended July 28), but total sales were up slightly.
Operating profit fell from $6.6 billion to $6.5 billion and operating margin fell from 15.4% to 15.1%. Earnings per share (EPS) fell from $4.65 to $4.60, but beat analysts’ expectations by $0.11.
Home Depot is in a strong cash position with robust profitability and is making significant strategic moves to maintain its leadership position in home improvement. The company has recently made several acquisitions, such as landscape, pool and roofing company SRS Distribution, that will give it more niche products and help it attract more professional customers. It is improving in-store functionality with features such as computer vision tools to ensure product availability on shelves, and it is well positioned to bounce back when conditions allow.
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 rise as interest rates fall.
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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 Rise If Interest Rates Are Cut This Month was originally published by The Motley Fool
