AT&T could be the best placeholder stock before rate cuts come

January 03, 2024 at 07:13 AM EST

A significant shift is about to come to the financial markets, as the forces that push and pull stock prices are pivoting from one end to the opposite in the coming months. Interest rates act as a pulley or lever to drive investment dollars into different places. The lever is being pulled now that the FED has pointed to potential rate cuts in 2024.

Some investors have prematurely jumped into certain stocks ahead of the coming rate cuts, which could work out if luck and good timing are on their side. If your portfolio needs more concrete strategy than luck and timing, then stay to find out why AT&T (NYSE: T) is the best stock to keep until the FED pulls the trigger.

With this new shift coming, there are additional reasons why AT&T is a better choice than close competitors like Verizon Communications (NYSE: VZ). All else the same, the Communication Services Select Sector SPDR Fund (NYSEARCA: XLC) offers you bullish momentum after outperforming the S&P 500 by as much as 24.0% in the past twelve months.

Factoring in

Understanding how money preferences shift is critical in this new market because when the FED lowers interest rates, a significant yardstick will also cause some stocks to fall in and out of favor for most investors looking for strategies. The yardstick, or benchmark, to remember today is the ten-year treasury yield.

Today, the government is offering you a 3.8% yield, so your job is to find stocks that can offer you a comparable yield and additional price appreciation to compensate for the added risk you would be taking on. AT&T and Verizon are attractive targets within the world of wireless stocks.

Starting with Verizon, this stock will attract many buyers today with its 6.9% dividend yield, which not only overtakes the ten-year yield but also places your investment dollars above today's inflation rate in the United States. What's not to like?

The only thing that would come to mind after a little bit of digging is the fact that analysts expect earnings per share to decline by 1.5% in the next twelve months since interest rate cuts usually fuel economic growth (which includes earnings for stocks), maybe Verizon won't be the one to attract that many investment dollars.

So look, sticking AT&T stock next to the statistics you now know from Verizon, the story does change a little bit for the better. Starting with the dividend yield, this stock also offers a competitive 6.5% yield, which does beat both inflation and the ten-year government yield.

So what's the difference maker? Analysts are projecting EPS growth of 2.5% in the next twelve months, which is more than double that expected from Verizon. In case you forgot, the market moves stock prices according to the underlying earnings they generate.

But wait there's more

Understanding that the new market you are going to inherit this 2024 will have a natural bias and preference for growth, AT&T will likely be the one to command the rewards from the marketplace with its higher expected EPS expansion, not to mention that its dividend can be the perfect placeholder while the FED sets up to pull the trigger.

But this wouldn't be a proper strategy if you didn't wonder about price and value, and in the case of AT&T, you are potentially going to get both. Starting with price action, Verizon stock only leaves a little room to move up from here; here's why that is.

Verizon stock is trading at 89.0% of its 52-week high prices, which can create a potential ceiling to be broken if the stock is headed higher than where it is today. While it is entirely possible, why put yourself in front of a wall and take on the challenge of punching through it?

On the other hand, AT&T stock is trading at 79.0% of its 52-week high price, leaving a lot more room to catch up to the pack, which means a greater margin of safety for investors. But don't just take the chart's word for it; analysts seem to be thinking in similar terms.

A $42.1 a share price target for Verizon stock matches the expectations for contracting earnings coming into next year, which is why this target only reflects a mere 8.7% upside from where the stock is trading today. While not a lousy upside potential, you're here for better.

How is a 20.3% upside for better? Because that is what analysts think is in store for AT&T stock and its $20.7 price target today. Earnings growth justifies the two sets of price targets, yet the market's price action seems like it's got a bit of catching up.

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AT&T could be the best placeholder stock before rate cuts come

Factoring in

But wait there's more

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