These businesses could both benefit as rates come down, especially if the economy has a soft landing.
The Federal Reserve recently cut rates by 50 basis points, the first reduction in the benchmark federal funds rate since early 2020. This has not only had the obvious effects of making it cheaper for businesses to borrow money but also has increased the likelihood of an economic soft landing (avoiding a recession).
In addition, this is expected to be the first in a prolonged series of interest rate cuts over the next couple of years. In fact, the Federal Reserve members recently projected an additional 150 basis points (1.5 percentage points) of rate cuts by the end of 2025.
Some businesses could be big winners from the Fed’s rate cuts, and that’s especially true if a recession can be avoided and the economy kept strong. Here are two stocks in particular that look interesting from a long-term perspective at their current prices.
A soft landing could have a big impact on travel demand
At a glance, Airbnb‘s (ABNB 1.90%) recent results look strong. In the second quarter, the travel disruptor beat expectations on both the top and bottom lines. The business produced $1 billion in free cash flow, strong growth in booking volume, and more. However, the company’s guidance scared investors, and the stock fell sharply.
Specifically, Airbnb reported that in the beginning of Q3, the business saw a “sequential moderation” of booking volume; in other words, there’s a slowdown happening. And the company specifically called out “signs of slowing demand from U.S. guests.”
However, it’s important to mention that the company said all this before the most recent inflation and economic data, before the Fed’s rate cut, and before the latest economic projections were released. An economic soft landing could certainly result in better-than-expected travel demand, and lower interest rates could boost consumer confidence.
To be sure, the falling-rate environment is negative for Airbnb in some ways. For example, the company has more than $11 billion in cash on hand in addition to more than $10 billion it is holding on behalf of hosts, and falling rates mean less interest income. But a falling-rate environment should generally be a positive catalyst, and Airbnb could be worth a look while it’s 25% below recent highs.
A big opportunity and more ability to pursue it
It’s no big secret that real estate investment trusts, or REITs, are highly sensitive to rising interest rates. In fact, during the height of the rate-hike cycle in 2022 and into 2023, real estate was the worst-performing sector in the stock market. And as rates come down, it could create a general tailwind for the sector.
One in particular to keep an eye on is EPR Properties (EPR 0.41%), which specializes in experiential real estate. The company is aiming to reduce its exposure to the uncertainty of movie theater properties (currently its largest property type) and sees a $100 billion addressable opportunity to acquire properties like waterparks, ski resorts, eat and play businesses, experiential lodging, and much more.
EPR has had a solid balance sheet and a ton of liquidity, but for the past year or so, debt-ratio covenants have effectively prevented the company from using its $1 billion credit line (not to mention that high borrowing rates have made it unattractive to take on new debt). But just recently, EPR entered into a new $1 billion credit facility that, among other things, “modifies the secured debt to total asset value covenant to permit the Company to incur additional secured debt if it so elects.”
In other words, EPR now has a credit line it can actually use, and falling interest rates will gradually make it more attractive to borrow. This combination could help the company take advantage of many more opportunities in the years to come.
Two great opportunities for patient investors
Neither of these are low-risk businesses, but both look like interesting long-term investment opportunities right now. Both are trading well below their highs and have some clear tailwinds from the expected falling-rate environment, and both appear well positioned to deliver market-beating total returns in the years ahead.
Matt Frankel has positions in EPR Properties. The Motley Fool has positions in and recommends Airbnb. The Motley Fool recommends EPR Properties. The Motley Fool has a disclosure policy.