Interest Rate Headaches: 3 Stocks at Risk If the Fed Does Not Cut Rates
The stock market has been on a caffeine high since the Federal Reserve promised to cut interest rates. The damaging economic impact of the Fed’s unprecedented ratcheting of rates could be minimized if rate cuts were to begin.
Yet the insatiable spending policies of politicians in Washington are keeping inflation high and growing. Fed president Jay Powell recently said he is no longer confident about when or if interest rates will be cut this year because of growing inflation. There’s even the possibility of new rate hikes!
That could send the stock market crashing. Even in a no-cut scenario, the outlook ahead is not bright. The following three stocks affected by interest rates will be particularly harmed if we don’t see the Fed cut rates soon.
Sweetgreen (SG)
Fast-growing casual restaurant chain Sweetgreen (NYSE:SG) has been a market darling. The stock is up 95% so far this year and has tripled in value over the last 12 months. Still, persistently high interest rates could corrode its armor.
The restaurant chain has been opening new locations at a brisk pace. Sweetgreen opened 45 net new restaurants, which were almost wholly responsible for the 29% jump in revenue it reported, in the fourth quarter. However, losses of 24 cents per share were wider than the market expected. The stock is down 16% from the highs it hit a little over a month ago.
Sweetgreen could see customers stop dining out quite as often if inflation persists and interest rates stay high. Paying restaurant prices for salad could become an expense that’s hard to justify. Consumers, in general, are in worse off financial condition than they have been and the added pressures could cause them to cut back. It’s not only a problem for Sweetgreen but for the restaurant industry as a whole. But because Sweetgreen has been a star performer in the industry, it could feel the impact more harshly than others.
AGNC Investment (AGNC)
Mortgage real estate investment trust (REIT) AGNC Investment (NYSE:AGNC) is another stock at risk of high interest rates. On the surface, it shouldn’t be. Because it invests in mortgage-backed securities (MBS), or mortgages that are backed by the full faith and credit of the U.S. government, grouped into a package and sold to investors, the risk would seem low. If there are defaults, government-sponsored enterprises like Fannie Mae, Freddie Mac and Ginnie Mae pay them off.
AGNC’s risk arises when interest rates are high. The REIT makes a profit on the difference between the interest rate it earns on assets and the rate it pays on borrowings. When rates rise, those spreads narrow considerably. The REIT just reported first-quarter earnings, sharing that its net interest spread fell from 3.08% to 2.98%. Though not fatal, it can take a toll over time. This is particularly true if the Fed doesn’t cut rates, or worse, raises them.
NextEra Energy (NEE)
Utilities are especially at risk of high interest rate environments. Because they are a capital-intensive business, rising rates cause the cost of their projects to rise as well. Since they are heavily regulated, even in good times you’re not going to see their profits soar. They are a slow-moving business often bought for their dividend payment.
Right now, NextEra Energy (NYSE:NEE) could be at risk. The stock is already down 15% over the past year because of interest rates and failure by the Fed to cut them could see shares sink lower.
President Joe Biden’s misnamed Inflation Reduction Act in 2022 has not been responsible for any of the easing in inflation over the past few years. Instead, it spent more money on clean energy and climate change projects. That, however, could benefit NextEra, which is pursuing various wind, solar, battery storage, hydrogen and renewable natural gas initiatives. And while it had numerous hedges in place against rates staying high, benefiting its bottom line, those are now expiring. It will soon face much higher interest rate expenses that will erode margins.
As noted, utilities are very sensitive to interest rates. NEE has been a top performer so far this year but that could change very quickly if the Fed doesn’t act.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
