In February, economist David Rosenberg opined that there’s an 85% chance that the U.S. economy will enter recession in 2024. Of course, there are opposing views with many economists talking about the possibility of a soft landing. However, it’s relatively clear that expansionary monetary policies might be needed to avoid a hard landing. Possibly, there will be more than one rate cut in the second half of 2024. Investors can therefore consider buying stocks for a Fed rate cut before they go ballistic.
If we talk about specific sectors, precious metals, energy, and commodity stocks tend to do well during times of expansionary policies. At the same time, rate cuts boost investment and consumption spending. I would therefore look at creating a diversified portfolio of stocks (industry perspective) that will benefit from possible rate cuts.
Let’s talk about seven stocks for a Fed rate cut likely to surge higher in the next few quarters.
In anticipation of expansionary monetary policies, gold has already been trending higher. It’s a matter of time before some of the best gold mining stocks go ballistic. Newmont (NYSE:NEM) looks undervalued at a forward price-earnings ratio of 18.6. The blue-chip stock also offers an attractive dividend yield of 2.84%. I would bet on 30% to 50% total returns for NEM stock in the next 12 months.
Newmont recently announced that the Company will focus on its tier one portfolio of ten assets. Further, Newmont will be selling six non-core assets. This is likely to boost the Company’s financial flexibility and help in cost reduction. I must add that with 128 million ounces in gold reserves and 155 million ounces in resources, the Company has stable production visibility beyond the decade.
It’s also worth noting that for 2023, Newmont reported operating cash flow of $2.8 billion. With the completion of acquisition of Newcrest Mining and higher realized gold price, I expect significant bump-up in cash flows. With an investment grade balance sheet, Newmont is well positioned to create value.
Occidental Petroleum (OXY)
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Even as oil faces macroeconomic headwinds, Occidental Petroleum‘s (NYSE:OXY) stock has remained sideways in the last 12 months. The undervalued blue-chip stock offers a dividend yield of 1.43% and is another one of the top stocks for a Fed rate cut.
If the Fed pursues rate cuts in the second half of 2024, I expect GDP growth to recover next year. Therefore, rate cuts will trigger positive price action for oil. OXY stock is likely to surge higher from depressed levels.
From a financial perspective, there are two important points to note. First, Occidental has an investment-grade balance sheet. There is ample flexibility for organic and acquisition-driven growth. Last year, the company acquired CrownRock for a consideration of $12 billion. The asset is likely to be immediately accretive to free cash flows.
Further, Occidental reported free cash flow of $5.5 billion last year. Healthy FCF will ensure value creation through dividends and share repurchase. At the same time, Occidental is focused on debt reduction and robust FCF will ensure that the targets are met.
Target (TGT)
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Consumption spending is a key GDP growth driver for the United States. A key part of consumption spending is retail sales. In a scenario of rate cuts, I expect retail spending to accelerate. This will be positive for some of the best retail stocks.
Target (NYSE:TGT) recently touched a 52-week high. However, the stock remains attractive at a forward price-earnings ratio of 18. Further, TGT stock is undervalued when compared to peers like Costco (NASDAQ:COST) and Walmart (NYSE:WMT).
It’s also worth noting that Target is on the verge of a turnaround. The company reported strong Q4 2023 numbers and if key metrics continue to improve, there is ample scope for upside in TGT stock.
For Q4 2023, Target reported comparable sales improvement for the second consecutive quarter. Further, the Company reported operating income margin of 5.3%, which was 200 basis points higher on a year-on-year basis. With operating efficiency and margin expansion, operating cash flows also swelled to $8.6 billion for 2023.
Vale (VALE)
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Vale (NYSE:VALE) is possibly the most undervalued industrial commodity stock. After a correction of 20% in the last 12 months, VALE stock trades at a forward price-earnings ratio of 5. Further, the stock offers a dividend yield of 9%. I would not be surprised if VALE stock doubles from current levels if there are multiple rate cuts in the next 12 months.
While the stock has been depressed, Vale has robust fundamentals. For Q4 2023, the Company reported adjusted EBITDA and free cash flow of $6.7 billion and $2.5 billion. Therefore, there is high flexibility for dividends and aggressive capital investments.
Another point to note is that the iron ore business is the key cash flow driver. However, Vale is diversified into copper and nickel production. These metals are likely to support global energy transition and I am bullish as Vale boosts production.
For now, the potential upside in iron ore prices on the back of rate cuts is likely to translate into EBITDA margin expansion and FCF upside. It’s another of the top stocks for a Fed rate cut.
Tesla (TSLA)
Tesla Motors (TSLA) now an SP500 company with a busy Pond Springs location in northwest Austin, TX
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Tesla (NASDAQ:TSLA) corrected sharply by 33% in the last six months. There are two reasons for the correction. First, intense competition has impacted growth. Further, Tesla has faced challenges due to macroeconomic headwinds.
I therefore believe that potential rate cuts can trigger positive price action in Tesla stock. Besides making loan relatively cheaper, it’s likely that macroeconomic headwinds will wane on expansionary policies.
Specific to Tesla, Cybertruck is due for mass deliveries and that’s a catalyst for revenue growth. Further, there seems to be excitement on the potential launch of Roadster in 2025.
I must add here that Tesla has ambitious plans to produce 20 million EVs annually by 2030. To achieve this target, investment in multiple new factors is likely. The potential investments will possibly be focused on emerging economies. Tesla has already committed to cut EV production cost to half. This will set stage for the next leg of growth in emerging economies.
Riot Platforms (RIOT)
Concept art of crypto mining with little figuring and a Bitcoin token.
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In my view, potential rate cuts will also be positive for the cryptocurrency space. Expansionary monetary policies, in general, translate into higher speculation across asset classes. Therefore, the ongoing crypto bull market is likely to have another catalyst in the form of rate cuts.
Among crypto stocks that look attractive, I am bullish on Riot Platforms (NASDAQ:RIOT). The Bitcoin (BTC-USD) miner has strong fundamentals and aggressive expansion plans. In my view, at least 100% returns are likely in the next 12 months.
From a fundamental perspective, Riot reported $597 million in cash buffer as of Q4 2023. Further, the value of Bitcoin in the balance sheet was $311 million. With no debt outstanding, Riot has a quality balance sheet.
It’s therefore not surprising that the Company is looking at aggressive expansion in the next 24 months. Riot ended 2023 with a hash rate capacity of 12.4EH/s. The Company is targeting to increase capacity to 31.5EH/s by the end of the year. Further, hash rate capacity is likely to swell to 40.8EH/s in the second half of 2025. Therefore, Riot is positioned for stellar revenue and cash flow upside.
Hecla Mining (HL)
Macro of silver
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Finally, let’s talk about a penny stock that’s likely to benefit from potential rate cuts. Hecla Mining (NYSE:HL) is the largest silver mining company in the United States. I believe that silver will catch-up with gold in terms of returns in the coming quarters. HL stock will surge higher from undervalued levels if this assumption holds true.
Besides higher realized price, there is another reason to be bullish on Hecla Mining. For 2023, the Company reported silver production of 3.1 million ounces. With Lucky Friday restarting production and the ramp-up of production from Keno Hill, I am bullish on robust growth. For this year, Hecla has guided for production of 5.1 million ounces. It’s worth noting that production growth will sustain in 2025.
Therefore, Hecla is positioned for strong revenue growth and cash flow upside. If silver surges higher, there is a case for significant EBITDA margin expansion in the second half of 2024 and in 2025. The penny stock is therefore worth accumulating at current levels.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
