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How to use the FED cuts to your advantage with these 3 stocks

By: MarketBeat

December 20, 2023 at 09:08 AM EST

Stocks to Buy

The winds start blowing from East to West, and you sit at a sunny beach shore and find yourself staring at the horizon. In one of those 'a-ha' moments, you realize something right in front of you: blowing winds don't help or hinder large ships, but they can get sailboats to wherever they're going quicker!

The FED and its interest rates direction act like the wind in this scene, and the stock market is the ocean carrying both the large ships and the sailboats, each doing its own thing. Now, rate cuts are being proposed (up to six of them) going into 2024, which means winds are about to start blowing hard.

This is why you should look into the sailboats: big guys like Costco (NASDAQ: COST) and Apple (NASDAQ: AAPL) will get to where they're going regardless of the wind. But names like Foot Locker (NYSE: FL), Trip.com (NASDAQ: TCOM), and Shake Shack (NYSE: SHAK) are the sailboats that can take you there quicker, wherever you're going.

The right boat

Why these stocks specifically? You may have noticed these names range between very different sectors, going from consumer discretionary, restaurant peers, and even technology stocks. But as you know, winds will help all boats, as long as they are the right ones.

How do you know they are the right ones to allow themselves to be helped by the changing winds? Think about it: Foot Locker could rightfully expect sales and demand growth shortly now that money is set to become cheaper (due to lowering rates) and consumers ease up their spending budgets.

The story mostly stays the same when you consider the reasons why Shake Shack could turn out to be a winner here. Eating out, especially gourmet burgers, is among the first things to get scratched out of the budget when times get hard. With cheap money, the grill will be working overtime at Shake Shack!

Now you can probably guess why Trip.com is also setting up to enjoy the winds of change from the FED. Who wouldn't finance a vacation when credit card interest rates start declining? And with oil dropping below $75.0 a barrel, plane tickets will make it more accessible than ever.

But, as any respectable investor (like yourself) knows, a good story without numbers is just a fairytale. So now that you got the gist of the land, it is time to back it up with actual data:

The market's stance

Keep the word premium here, and remember that it is always associated with feelings or offers of higher quality and service. When it comes to stocks and the way markets value them, a premium price will also reflect their expectations of something special to come.

When you shop for that premium boat, in the world of restaurant stocks, Shake Shack stands out in its price tag. Looking at the forward price-to-earnings ratio, the metric used by markets to gauge the value of the next twelve months of earnings, can be a start.

The industry trades, on average, at a 22.5x forward P/E; Shake Shack finds itself selling for a 570.0% premium to the sector with its 1504x multiple, and for good reason. Nobody can know why markets are willing to overpay for this stock, but you can start with earnings growth.

Analysts are projecting EPS growth of 35.3% for the next twelve months, which is more than double the industry's average expected 14.0% growth. There it is, double the growth? It comes with a price.

Trip.com follows for a second act here, and there's a new angle for you to come to the same conclusion, all for the sake of education. This stock is trading at 77.0% of its 52-week high, officially in bearish territory. However, the leisure industry is changing at an average of 88.1%.

So, Trip.com is performing below its peers price-wise; what about financially? Analysts see EPS jumping by 24.2% next year versus an industry average of 16.6%; no wonder a $49.2 a share price target reflects a 43.6% upside from today's prices.

Last, Foot Locker finds itself in a similar spot, trading at 67.0% of its 52-week high, which doesn't do justice to its stats. EPS growth of 53.3% is more than five times higher than the 10.5% industry average, leaving a considerable gap to make up in its price as a rightful winner.

Three boats, the same winds blowing behind them. When it rains, it pours, and 2024 could be a fat year for your portfolio if you choose to consider adding these names to a watchlist.

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How to use the FED cuts to your advantage with these 3 stocks

The right boat

The market's stance

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