A Stock That Will Love a Rate Cut

July 31, 2024

Though I’ve studied it since 2004, I don’t love fundamental analysis.

I don’t find it an effective or useful way to pick stocks.

That said, we do have a big economic event coming up in our near future.

And that’s a rate cut from the Fed.

Why is that big?

Because rate cuts are always big.

(I’m not going to go into a detailed explanation of why. It’s too boring.)

What we do know is that real estate gets more enticing when rates are low. Right?

Better mortgage rates mean more people want to buy and sell houses. And, obviously, worse/higher mortgage rates mean no one wants to buy a house, there are potentially more defaults, and there’s less investment overall.

So guess what?

REITs do poorly in high interest rate environments. No surprise there.

Here’s an example.

From January 2006 through July 2023, REIT Realty Income (O) beat the market handily while paying a much larger dividend (REITs pay nice dividends):

What do you think happened as rates have risen in the past couple of years?

The lead has dramatically dropped as O has slumped (due to rates):

Realty Income is still better than an index fund, but it’s really struggled lately.

The big question: what will happen when the Fed allegedly lowers rates in September?

Do you think REITs like O will rise?

Further, is O selling at a discount to “fair value”? Yes indeed:

(Notice how O has been rising lately as the likelihood of a rate cut has gotten higher?)

The current price (as of this writing) is around $57.60. “Fair value” is up at $62.29.

If we were a buy-and-hold investor, we have an opportunity to get the most famous monthly dividend stock on sale. Plus, we have the potential tail-wind of interest rate cuts.

It’s something to think about.

In our next Newsletter, we’ll look at two more potential opportunities.

Talk to you soon.

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