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Fed's Emergency Rate Cut a Boon for These 5 Stocks

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In a rare inter-meeting move, the Fed announced an emergency rate cut on Mar 3. The central bank trimmed its fed funds target rate by half a percentage point to a range of 1-1.25%. In fact, the last time the Fed cut rates on an emergency basis was in the December 2008 financial crisis.

The rate cut aims at thwarting the coronavirus threat to the economy. After all, worries over how the outbreak will impact corporate profit margins and global economy have been roiling the U.S. stock market of late.

Several well-known companies like Apple, Nike, United Airlines and Mastercard raised concerns about their upcoming earnings and revenue results. They are worried that the outbreak will dent demand for goods and services. And since the impact is mostly in China, the virus will lead to both a demand and a supply shock for the global economy. After all, China is one of the world’s largest exporters and importers of goods.

Fed Chair Jerome Powell in the meantime said to officials that “we’ve come to the view now that it is time to act in support of the economy, and that our action will provide a meaningful boost to the economy.” The Fed’s decision, which was undivided, came after G-7 finance ministers as well as central bankers agreed to take a “coordinated effort” to curb the impact of the coronavirus.

In fact, Bank of Japan Governor Haruhiko Kuroda has already said that Japan will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases” (read more: Coronavirus Fears Holding You Back? 3 Smart Ways to Invest).

Stocks That Will Make the Most of a Rate Cut

Thanks to the rate cut, shares of rate-sensitive real estate and utilities will certainly climb. Rate cuts are a boon to real estate activities. After all, lower interest rates will decrease borrowing costs for projects, which will significantly help companies, predominantly involved in the construction business.

Utilities, in the meanwhile, are capital-intensive businesses and the funds generated from internal sources are not always sufficient to meet requirements. Consequently, these companies have high levels of debt. Thus, low interest rates will help pay off debts and book profits.

If we look at others sectors, healthcare stocks generally outperform after a rate cut. Barclays had compiled data that showed healthcare stocks generally rise nearly 7% in the nine months following a rate cut. And what makes this set of stocks stand out is that they tend to rise consistently. Moreover, healthcare stocks are known for paying hefty dividends, which makes them more alluring when rates decline in uneasy economic conditions. Needless to say, lower interest rates mostly tend to raise prices of high-yielding stocks.

Top 5 Picks

We have, thus, selected five solid stocks from the aforesaid sectors that are poised to gain from the rate cut. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

D.R. Horton, Inc. (DHI - Free Report) has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has jumped 7.3% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 21.5% and 22.8%, respectively.

PulteGroup, Inc. (PHM - Free Report) has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has climbed 6.4% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 18.6% and 18.3%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.

Atmos Energy Corporation (ATO - Free Report) , known for natural gas distribution, and pipeline and storage business, has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 0.4% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 5.5% and 7.8%, respectively.

Medtronic plc (MDT - Free Report) , known for manufacturing and selling device-based medical therapies to hospitals, physicians, clinicians, and patients, has a Zacks Rank #2. The company has a dividend yield of 2.1%. The Zacks Consensus Estimate for its current-year earnings has moved up 0.7% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 5.2% and 8.1%, respectively.

AmerisourceBergen Corporation (ABC - Free Report) , known for distributing pharmaceutical products, has a Zacks Rank #2. The company has a dividend yield of 1.93%. The Zacks Consensus Estimate for its current-year earnings has risen 2.7% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 8.1% and 8.5%, respectively.

Shares of D.R. Horton, PulteGroup, Atmos Energy, Medtronic and AmerisourceBergen have gained 42%, 57%, 7.2%, 8.3% and 7.8%, respectively, over the past year. Take a look —

 

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