Interest rates have started to decline, for the first time in four years, and after a hefty interest rate hike cycle. The bond market is starting to predict future rate moves, with the expectation that the half-point rate cut will slow down to quarter-point increments.
No matter the speed, the direction of interest rates suggests that some sectors will benefit over the months ahead. And that being in the right sector to benefit from declining interest rates could see big returns.
For instance, homebuilders should benefit from lower rates. The housing market has been frozen over the past two years, with existing homeowners unwilling to leave a low mortgage rate.
But these stocks have still been inexpensive to begin with and trade like a value investment today.
Among the homebuilders, Lennar (LEN) looks attractive. Shares have doubled the market’s performance in the past year with a 62% gain, but still trade at 11 times forward earnings. Operationally, revenues are up 8% and earnings are up 5%, but that trend should accelerate as interest rates decline.
Action to take: Investors may like shares here, and could potentially add to that position on any market weakness in the months ahead. At current prices shares, pay a 1.1% dividend, which was recently increased.
For traders, the February 2025 $190 calls, last trading for about $11.00, could see mid-to-high double-digit returns. Shares have a 52-week high right near that strike price, so a new all-time high could mean a further rally.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.