Wall Street is eagerly awaiting the long-anticipated pivot from the Federal Reserve’s quantitative tightening cycle. While no one can pinpoint the exact timing of such a shift, the Fed has signaled three rate cuts this year. However, recent inflation data have cast doubt on whether we’ll see any easing at all in 2024. Personally, I believe at least one rate cut is likely, given the political pressures of an election year. Regardless, nearly everyone agrees that inflation will eventually subside. That should pave the way for significantly lower interest rates over the next two years.
Certain stocks stand to benefit disproportionately from the renewed liquidity and economic tailwinds that lower rates would provide. As lending costs decline, consumer demand and business investment could rebound sharply. Pinpointing these potential winners now is a good idea. With that in mind, let’s look at the three stocks that could surge once rate cuts kick in.
American Airlines (AAL)
The airline industry was facing headwinds even before the pandemic struck, with American Airlines’ (NASDAQ:AAL) stock down a staggering 50% from its 2018 peak. While the travel boom has provided some relief, AAL stock has largely traded sideways around the $10-$15 range in recent months. However, I believe the market is undervaluing this stock’s potential at its current depressed valuation.
Trading at just 11.5-times trailing earnings, American Airlines appears excessively cheap, especially considering its earnings power could be obscured by the high interest rate environment. The company paid a whopping $1.6 billion in net interest expenses last year. Yet, American has managed to stay solidly profitable while deleveraging its balance sheet by around $12 billion since mid-2021.
Once interest rates inevitably come down, this immense interest burden will be alleviated, potentially unlocking significant upside. The market seems to be underappreciating the impact of future rate cuts, which I’m confident will materialize within the next two years or sooner. As this tailwind kicks in, AAL stock could take flight from its current bargain-basement levels.
PayPal (PYPL)
PayPal (NASDAQ:PYPL) is a misunderstood growth story poised to soar once rate cuts take effect. While the fintech giant’s slowing user growth has spooked Wall Street, causing shares to plummet 47% from pre-pandemic highs, I believe this stock price move overlooks PayPal’s underlying strength.
Despite user churn, PayPal continues growing steadily. The company reported year-over-year revenue growth of nearly 9% and net income near record levels in its recent quarter. This suggests those departing PayPal aren’t necessarily the company’s most profitable customers. PayPal has a sticky core user base that it has been successfully monetizing at increasing rates.
Looking ahead, analysts forecast PayPal will sustain 8%+ annual sales growth and low double-digit earnings growth in the coming years. For a company boasting cash flow prowess and merchant acceptance rivaling Visa (NYSE:V) and Mastercard (NYSE:MA), paying less than 17-times earnings is an absolute steal, in my view.
With billions allocated to share buybacks and the potential for dividend initiation akin to Meta’s (NASDAQ:META) recent move, PayPal could unlock immense value as an economic revival spurred by lower rates reignites user growth. I see tremendous upside ahead for this under-appreciated fintech titan.
Six Flags Entertainment (SIX)
Six Flags Entertainment (NYSE:SIX) finds itself in a similar position to other travel companies awaiting relief from high interest rates. The company was racking up debt well before the pandemic (much of it floating-rate), resulting in a painful $158 million net interest expense burden last year. For context, Six Flags’ entire market cap hovers around just $2 billion currently.
Despite this near-term strain, the stock has traded rangebound between $20-$25 since July 2022 as the market seemingly awaits a catalyst. I believe falling interest rates could provide that spark, given Six Flags’ well-established business model and robust margins. You’re paying a mere 13-times forward earnings for a company that analysts see delivering 36.3% earnings per share growth in 2024, and 22.3% the following year.
A sustained decline in rates could potentially boost those rosy projections even further. This overlooked theme park play may not be making headlines today, but its fortunes could shift rapidly in a lower rate regime that benefits discretionary consumer spending.
On the date of publication, Omor Ibne Ehsan 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.