Investors, consumers, businesses and borrowers love it when the Federal Reserve cuts interest rates. It means that financing purchases is cheaper for everyone. It means many mortgage rates (certainly ARMs) will head lower. It means businesses can borrower for cheaper. It means credit cards have lower rates. It’s just wonderful. The two problems with this interest rate cut from Jerome Powell and the Federal Reserve’s FOMC is that 1) everyone from here to Timbuktu knew it was coming and 2) is that it was perhaps six months later than the markets were originally forecasting at the start of this year.
The Efficient Market Hypothesis is the theory that market prices (or share prices) reflect all of the available information, making above-market returns difficult to achieve. Oggonomics has a mantra against the Efficient Market Hypothesis — it is either not very efficient or it is just dead.
Oggonomics reviews dozens of analyst reports each morning to find new ideas for long-term investors and for short-term investors alike. These analyst calls are often a great source for finding new investing and trading ideas that might have otherwise been overlooked or missed. Just don’t dare forget that no single analyst report should ever be used as the sole reason to buy or sell a stock. That decision to buy, sell or hold ultimately needs to be made by each investor along with their financial advisor.
As this is the expected kick off of a new interest rate-cutting cycle there have already been too many analyst ratings changes covering stocks to buy and stocks to sell. The original day’s reaction to the cut was a small sell-off. But Thursday was a new day and stocks rallied sharply 1% on the Dow, 1.5% on the S&P 500 and up 2.5% on the NASDAQ.
The big question here is why there is suddenly such a large movement into some stocks the day after the news. Oggonomics is absolutely quite puzzled by some of the analyst upgrades that have been seen. Again — everyone knew the rate cut was coming, with just 25-bp or 50-bp as the wildcard. It was 50-bp and every single market participant that will offer an opinion believes more rate cuts are coming. Oggonomics outlined the path for 200 basis points worth of cuts by the end of 2025.
These are some of the unusually bullish analyst ratings changes and price target changes that were tracked on Thursday, September 19, 2024.
THE SPHERE
Sphere Entertainment Co. (NYSE: SPHR) is formerly Madison Square Garden Entertainment Corp. It owns the Sphere in Las Vegas as a next-generation entertainment medium powered by cutting-edge technologies to give a unique experience to an audience. Tickets to see performances can be quite costly, and even an interactive immersive concert film of U2 (film, not live performance) next week is $159 to over $300. Live venue tickets can run much higher for other bands performing.
Guggenheim reiterated its Buy rating on Sphere Entertainment and raised its price target to $63 from $58 in that call. Here are two competing calls made in the days ahead of Guggenheim call:
- BofA maintained its Neutral rating (9/17) and cut its price objective to $43 from $45.
- Benchmark (9/03) said its profit outlook is “underwhelming” and downgraded the stock to Sell from Hold with a mere $40 price target. The call also warns of scalability concerns, weaker consumer spending and high production costs.
Sphere was last seen trading up 6.7% at $42.67 on Thursday. Guggenheim’s new $63 price target implied more than 50% upside from Sphere’s prior $39.99 closing price. Its 52-week range is $27.02 to $51.83.
HOUSING MARKETS UPGRADED — STRONG ALREADY, EVEN HIGHER
It is not unusual that housing would be getting a big boost of interest rates are going to go even lower. The SPDR S&P Homebuilders ETF (NYSEArca: XHB) was up 2% to $124.00 and the iShares US Home Construction ETF (NYSEArca: ITB) was up 1.8% at $127.85 on Thursday afternoon. Here is the problem with getting excited about housing if the markets were all factoring in rate cuts (on top of us all knowing rate cuts are coming)– the XHB is up 11.6% over the last month and up 30% YTD and the ITB performance is up 11% over a month and up 26% YTD. Both ETFs are up over 50% from this time a year ago.
Here are some of the housing upgrades or price target changes seen along with the gain on Thursday and YTD gain included multiple stocks at multiple firms.
Lowe’s Companies, Inc. (NYSE: LOW) reiterated Hold at TD Cowen, but the firm raised its price target to $265 from $240. Lowe’s was up 1.8% at $261.25 today; up 17.4% YTD. The firm is constructive on the Pro progress and market share growth continuing with its product mix expected to increase over time.
Builders FirstSource Inc. (NYSE: BLDR) is a key supplier of building products and its stock was already screaming higher from its ~$132 lows in July. BofA Securities reiterated its Neutral rating but raised BLDR’s price objective to $$198 from $165. BLDR was up 3.5% to $201.30 on Thursday and its stock is up 20% YTD and up 55% from a year ago.
Toll Brothers Inc. (NYSE: TOL) was reiterated as Buy at BofA Securities and its price objective was raised to $165 from $160. Toll was up 1.6% to $152.50 on Thursday and its stock is up a whopping 48% YTD and up an even more impressive 95% from a year ago.
PulteGroup Inc. (NYSE: PHM) was reiterated as Buy at BofA Securities, but while the firm raised multiple price targets to adjust for “a better rate story” this price objective being raised to $160 from $138 was among the more impressive hikes. Pulte was up 2.4% to $144.40 on Thursday. It now has right at a $30 billion market cap and its stock is up a whopping 48% YTD and up an even more impressive 95% from a year ago.
DR Horton Inc. (NYSE: DHI) was also reiterated as Buy at BofA Securities and its price objective was raised to $215 from $196 . DR Horton was up almost 1% at $196.00 (a new high). DR Horton now has a $63 billion market cap. Its stock is up over 28% YTD and up 72% versus a year ago.
TWO ‘SAFE’ REIT PLAYS?
REITs are supposed to like lower interest rates as well. After all, they borrow money for most projects and they pay out almost all of their net income (or Funds from Operations/FFO) as dividends to their shareholders.
Safehold Inc. (NYSE: SAFE) was raised to Outperform from Market Perform with a $34 price target at Raymond James. The call noted that lower interest rates are likely to drive more investment opportunities for the company, and the lower interest rate environment should increase its investment pipeline for te rest of 2024 and increase its investment activity in 2025. Shares of this diversified ground lease REIT had already risen from $19 in July up to $27.50 on last look (stock actually down 37-cents today). Still, its gain is 17% YTD and it is up 42% from a year ago. Safehold offers a 2.6% dividend yield at current prices.
Equity Lifestyle Properties Inc. (NYSE: ELS) is a $13-plus billion REIT that largely targets manufactured homes and RV communities. Wells Fargo raised ELS to Overweight from Equal-Weight and raised its price target to $82 from $70.50. The firm sees ELS offering above-average and highly visible top-line and bottom-line growth and at reasonable valuations versus residential peers. Wells Fargo points out that ELS’s defensive nature gives investors an added benefit with risks elsewhere of a lingering election, geopolitical risks and economic uncertainty. ELS was at $64 in July, and Thursday’s gain was up 0.5% at $73.86. It is lagging a bit in 2024 with a gain of 4.7% YTD and 11% versus a year ago. Equity Lifestyle Properties has a 2.5% dividend at the current price. This was a $87 stock back in 2021, right before higher interest rates came into play.
A LEVERED BUT RISKIER REIT
REITs are supposed to be rate-sensitive. Again, they typically borrow large sums of capital to own and operate properties and they pay almost all FFO out as dividends.
Global Medical REIT Inc. (NYSE: GMRE) is a small-cap $670 million) REIT that acquires properties to lease to healthcare systems and physician groups. It recently announced a $80 million acquisition of a 15-property portfolio of outpatient properties and continues to look for more opportunities. While some pressure has been seen elsewhere in medical REITS, its portfolio leased occupancy rate was 96.2% at the end of the last quarter. Its average lease term was 5.8 years, with average annual rent escalations of 2.2% and its portfolio rent coverage ratio was 4.6-times. One of the drags has been the bankruptcy of Steward back in May, which represented 2.8% of its portfolio. Its stock had risen from $8.50 to $11.50 in the fourth quarter of 2023 back when the market was expecting the Fed to begin its easing campaign early in 2024.
Alliance Global Partners initiated Global Medical REIT with a Buy rating and it issued a $12 price target (versus $10.15 now). The internally managed net-lease REIT was shown by Alliance as improving in the acquisition market and a balance sheet (liquidity and access to additional capital) to help fund new acquisitions. That in turn offers a valuation upside for Alliance’s Buy rating at price target. This represents nearly 19% upside in price before factoring in an 8% dividend yield. GMRE’s performance is still negative at -8% YTD and it is up 7% from a year ago. The customer bankruptcy above has been a known issue for months and the REIT shares have recovered from the $8.00-$8.50 base to over $10 recently.
YOU’VE GOT THE POWER!
Anything tied to utilities and infrastructure is also tied to heavy borrowings. That’s also true for engineering and construction services that target power and utilities.
Quanta Services, Inc. (NYSE: PWR) was started in new coverage by Wolfe Research with an Outperform rating and $313 price target. What investors should consider here is that Quanta has been on a multi-year massive rally and the rate hikes of recent years hardly had an impact on its long-term appreciation. Quanta was called best-in-class as an infrastructure solutions provider to electric and gas utilities, and to renewable energy and energy sectors. Wolfe Research went on to note that it is leveraged to current megatrend themes in data centers and electrification, to energy transition and to climate risk. Quanta shares are up 34% YTD and up 46& versus a year ago.
A CRYPTO WINNER
Similar to gold, lower interest rates are supposed to be helpful to bitcoin and crypto investors because the relative yields of cash will look less attractive ahead.
Piper Sandler reiterated an Overweight rating on Robinhood Markets Inc. (NASDAQ: HOOD) and raised its price target to $27 from $23. The firm is projecting that comprehensive crypto legislation will soon pass in the U.S. and that Robinhood should benefit if that comes to pass. It has a relatively conservative crypto offering base, but one that can be expanded quickly. Its younger customer base also still has a large appetite for crypto products. This could add another 10% to 12% in earnings upside by expanding its crypto offering similar to what crypto-peers offer. Robinhood fell to $15 at the lows of August, but it is back up to $22.80 on last look (actually down 15-cents on the day). HOOD’s gain has been a sharp 78% YTD and it’s up 117% versus a year ago.
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DISCLAIMER — Oggonomics always reminds its readers and all investors that no single analyst report should ever be used as the sole reason to buy or sell a stock. The decision to buy, sell or hold needs to be made by each investor along with their financial advisor. Analyst upgrades and downgrades can be a reliable source for finding new ideas that might have otherwise been overlooked or missed. Long-term investors get a picture of new buy, sell and hold ratings with targets a year out. Short-term traders get a glimpse of immediate price reactions to news and to the analyst calls. That said, analyst calls give absolutely no assurances that their views will pan out nor do they come with assurances of gains for investors. Some analyst calls can even result in investor losses even if the overall stock market and the same sector sees gains.
