Buy Hold Sell: 5 interest rate sensitive stocks for a new world of lower rates

First up today we have Lowe's Companies. It's not the Lowe's you're thinking of. This one specialises in home improvement products. Jacob, I'm going to start with you today. Is it a buy, hold, or sell?

Lowe's Companies (NYSE: LOW)

Jacob Mitchell (HOLD): Thanks, Ally. It's a hold. We own the stock. It's basically a duopoly with Home Depot, which trades on 20 times. It's been a renovation beneficiary. As Americans haven't been able to sell their homes because of high rates, secondary transactions have collapsed. So, you've had to instead stay in place, shelter in place and upgrade. And it's a great business, a very high-quality business, but at 20 times, probably doesn't have that high octane leverage to lower rates.

Ally Selby: Its share price is up 45% over the last 12 months. So, it's done exceptionally well over the last year. Arvid, do you think it can go even higher? Is it a buy, hold, or sell?

Arvid Streimann (HOLD): Hold. And let me tell you why. So, we actually hold this stock. So it's interest-rate-sensitive. I think it's going to benefit from any pick-up in housing activity. On our calculations, the US mortgage, the 30-year fixed mortgage rate needs to go from its current level of around 6.5% to let's call it 5.5% for this thing to really start producing some money, so to speak. And we don't have a high level of conviction around that. It's certainly a possibility. But we certainly have that in the portfolio because it could happen. And if that does happen, we want to have that interest rate sensitivity in that portfolio.

Ally Selby: Next up today we have Eversource Energy, which is a classic utility company providing energy to the northeast of America. Arvid, is it a buy, hold, or sell?

Arvid Streimann (BUY): Buy. And let me tell you why. So Eversource Energy, I think, is quite an interesting rate play because its valuation is going to be highly sensitive to interest rates. It's cleaned up its businesses. It used to have an offshore wind business, which they've managed to sell off. So it's become a cleaner play. And when you think about these types of companies, you think about the interest rate risk, but you also think about what's happening with regulatory risk. And I think that there's a discount in the share price right now for some regulatory risk. If that comes through, I think it's already in the share price. If it doesn't, then I think you're getting compensated for taking on that risk which doesn't happen. So that's a buy for me.

Ally Selby: Okay. Its share price is up 26% over the past year. Jacob, is it a buy, hold, or sell?

Jacob Mitchell (SELL): Sell. In the utility space, we look for regulated utilities that are in parts of America where you're going to get natural deployment of renewables; in the Midwest, all the southern states, and where you'll also see a lot of investment in connecting those renewables to the load centres, which are typically on the east or west coast. So you'll get higher growth in the regulated asset base. Secondly, we also look for companies that are not over-earning versus their regulated asset base. And thirdly, those that don't carry excess leverage. So that points us not so much to Eversource but to companies like American Electric Power (NYSE: AEP) or Ameren (NYSE: AEE). We just like better-located assets, with not as much leverage, where profits are cleaner.

Ally Selby: Okay. Next up today we have Capital One Financial. It's an American bank and credit card company that is using AI in a really unique way. Jacob, I know you love this stock. Why are you buying it?

Jacob Mitchell (BUY): We think a hard landing is priced into the multiple at seven times. You have to remember also that there are puts and takes. You'll get rate cuts. As you get rate cuts, that protects their NIM, even if credit costs start to go up. On top of that, they are highly likely to be able to pull off the merger that they have with Discover (NYSE: DFS), which will really propel them into that leading credit card company in the US. We think the ROE is roughly the same as JP Morgan (NASDAQ: JPM) and you're buying it at five times versus 12 times. And then if they over time get a premium because they own a network and they can internalise a lot of their volume on their own rails, then you start to talk about an American Express (NYSE: AXP) type multiple, which is much, much higher.

Ally Selby: Okay. Its share price is up 73% over the last 12 months. It's had a really fantastic year. Arvid, is it a buy, hold, or sell?

Arvid Streimann (HOLD): I'm going to say hold here. And the reason is that I don't think it's really that cheap. When we're thinking about these credit card companies, and Capital One is one of the big four in America, we're really looking at them to see, okay, is the credit risk that these types of companies have, is that priced in too much or too little? When we look at these types of companies, and I think this is one of the ways you can make a lot of money out of these types of companies - it doesn't look to us as though their book, their credit card book, which is overweight subprime, is mispriced. And so if it was mispriced, we'd be more interested, either buying or selling. But right now, it looks to be more or less fairly priced, so we're a hold.

Ally Selby: Okay. We asked our guests to bring along a big buy today that they believe could benefit as interest rates head south. Arvid, what have you brought for us? 

Intercontinental Exchange (NYSE: ICE)

Arvid Streimann (BUY): We've chosen Intercontinental Exchange. It's one of the biggest exchanges around the world, but the interest rate sensitivity really comes through its mortgage business. So, we're thinking about what's happening in America. We all know that a lot of people in America, lucky them, have managed to lock in their mortgages for 30 years at a very low rate. And so there's not that much mortgage activity that's happening right now. But if interest rates continue to fall, then more people might find it interesting to refinance their mortgage. 

Essentially, what Intercontinental Exchange's mortgage business is going to do is it's going to clip the ticket on some of that business. So, we think that its mortgage business is about 20-25% of overall revenues, but if things pan out as we think, then I think that that business could grow at least twice as fast as the rest of the business.

Ally Selby: Okay. Over to you, Jacob. Your time in the hot seat. What interest-rate-sensitive stock are you backing today, and why?

Jacob Mitchell (BUY): We have another bank or financial, and it's a French bank, SocGen. You can think about it as just a fairly dominant retail bank. It would be a bit rich to describe it as the CBA (ASX: CBA) of France, but maybe the Westpac (ASX: WBC). 

The way interest rates are set in France, if you like, or the way the banking system operates, is their lending rates go up slower than their deposit rates, which is the opposite of Italy. And Italian banks have been fantastic. We own UniCredit (BIT: UCG). So, what happens when rates start to come down is French banks keep repricing their lending, and at the same time they start to get relief on their deposit costs. So you get NIM expansion as rates come down. 

Ally Selby: Well, I hope you enjoyed that episode of Buy Hold Sell as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube and podcast channels; we're adding so much great content just like this every single week.