Are More Rate Cuts Necessary to Maintain The Current Economic Trajectory?
Despite global uncertainties, the US economy is viewed as stronger than its international counterparts. But then again, market challenges are undeniably persisting, and strategists are inclining toward one opinion or the other to help investors build a stronger portfolio for the rest of the year.
In such volatility, quality stocks with reliable earnings offer potential opportunities for risk-averse investors. Interest rates are currently high, but there is potential for significant gains if they decline. As current economic indicators support a favorable environment for growth and income generation, we covered a conversation from CNBC in our 10 Best Quality Stocks to Buy According to Analysts article, where the Global Investment Strategist at ProShares Advisors, Simeon Hyman, emphasized ‘income’ as a key focus, highlighting that fixed-income markets could provide 10-15% returns if geopolitical tensions worsen. Here’s an excerpt from that article:
“…the yield on the 10-year bond is nearly 4%, and there is potential for it to drop to 3% or lower if significant negative events occur. This scenario presents an opportunity for investors to realize gains of 10% or 15% on bonds in a tumultuous environment, a situation not seen in over a decade. Despite the current market being down by 3.7%, which is slightly less than 4%, Hyman insisted that rounding was at play… there has been a 50-basis point cut and indications of a soft landing for the economy. A month-over-month increase of just 0.1% suggests that if one can overlook geopolitical issues, the US economy is faring better than many others globally and remains on solid economic footing.”
Richard Fisher, Jefferies’ senior advisor, joined ‘Closing Bell’ on CNBC on October 1 to discuss the Fed’s recent rate cut and what it means for the market from here. The former Dallas Fed Chair Richard Fisher shared his insights on the current state of monetary policy and the Fed’s approach to interest rate cuts, noting that he was not surprised by Chair Powell’s signals indicating smaller rate cuts are forthcoming. Fisher explained that he had been bullish since the end of 2023, despite initially predicting a recession that did not materialize. He emphasized the importance of measured cuts, stating that the Fed is looking at monetary policy with a long-term perspective, roughly 18 months out.
He highlighted the significance of recent economic data, particularly from the Atlanta Fed, which indicates strong growth above 3%. Fisher characterized the current economic environment as experiencing neither a soft landing nor a hard landing, but rather a smooth glide path. He believes that two more quarter-point cuts would be appropriate to maintain this trajectory. When discussing concerns about whether current rates are too restrictive relative to inflation, Fisher disagreed with the argument and pointed out that financial conditions remain accommodative, citing narrow spreads and strong private lending activity. He argued that with another two cuts, the Fed would not be overly restrictive.
Despite acknowledging Powell’s effective leadership, Fisher maintained that it was premature to declare victory regarding economic stabilization. He believes Powell’s term will continue until April 2026, and only then can a true assessment of success be made. Overall, Fisher’s emphasis on measured rate cuts and ongoing economic strength underscores the delicate balance policymakers must maintain in fostering growth while managing inflationary pressures.
This could have a positive impact on the stock market, especially for undervalued quality stocks. When interest rates fall, investors often shift their focus to equities as they seek higher returns. This could lead to increased demand for undervalued quality stocks, potentially driving up their prices. In that context and given Fisher’s cautious optimism, we’re here with a list of the 10 most undervalued quality stocks to buy according to analysts.
Methodology
To compile our list, we first sifted through Vanguard U.S. Quality Factor ETF holdings to find the ones with an upside potential of over 15% as of October 7, 2024. We then selected stocks with a forward P/E ratio under 15 and made a list of 10 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of their analysts’ upside potential.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Popular Inc. (NASDAQ:BPOP) is a full-service financial services provider and one of the 50 largest US banks by assets. It’s primarily focused on serving the Hispanic market in the US and Puerto Rico, offering a range of financial products and services, including personal and commercial banking, mortgages, wealth management, and insurance.
The company’s Q2 2024 results were boosted by higher interest income and lower loan losses. Loan balances rose by $473 million, with Popular Inc. (NASDAQ:BPOP) leading growth by $509 million. Deposits increased by ~$1.7 billion, driven by Puerto Rico government funds. Net interest margin improved by 6 basis points to 3.22% due to higher loan balances and interest rates, partially offset by rising deposit costs.
Overall, the company’s revenue grew 6.14% in Q2. Noninterest income rose by $2 million. Credit quality improved with lower losses and bad loans. Consumer spending remained strong, with card sales up 5%. Tangible book value per share increased by $2.65. Auto loan and lease balances increased by $129 million due to strong demand for new cars. Mortgage loan balances rose by $107 million, driven by home purchases.
Business activity in Puerto Rico remained positive, with the tourism and hospitality sectors leading. Passenger traffic at San Juan airport increased by 8%, while hotel occupancy remained flat. US credit demand is lower than expected.
Popular Inc.’s (NASDAQ:BPOP) credit quality metrics have significantly improved compared to pre-pandemic levels, demonstrating the resilience of its loan book. The recent performance reinforces investor confidence and makes this one of the top stocks to consider.
Overall BPOP ranks 10th on our list of the most undervalued quality stocks to buy according to analysts. While we acknowledge the potential of BPOP as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BPOP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
