If you invest $1,000 in a few stocks, buying into companies you will likely hold for a while makes sense to avoid trading costs eating into your returns. Moreover, a decent dividend from a stock will pay for the trading costs and return more than you might get from a bank while you wait for long-term capital appreciation.
In this context, buying into stocks that benefit when the Federal Reserve ultimately starts cutting interest rates is a good idea, and I think Whirlpool(NYSE: WHR), Owens Corning(NYSE: OC), and Unted Parcel Service(NYSE: UPS) are three such companies. Here's why.
1. Whirlpool faces a challenging year, but the stock is in value territory
Lower interest rates will do wonders for the U.S. housing market, which means there is good news for the demand for household appliances.
That's especially relevant to Whirlpool because it is set to increase its focus on its core North American market this year. It will do so by combining its low-margin European business with a subsidiary of a Turkish company to create a new company, which Whirlpool will own 25% of.
The deal will free up management's time and resources to grow margins at its North American segment while implementing $300 million to $400 million of cost cuts in 2024, down from $800 million in 2023.
As such, Whirlpool will likely end 2024 as a more focused company, with lower structural costs and an improving household appliances market. Management's outlook for 2024 isn't great (revenue and profit margin are forecast to be flat against 2023 on a like-for-like basis), and there's near-term risk around its earnings.
But the company is doing an excellent job of reducing inventory in difficult end markets, and a forward price-to-earnings (P/E) multiple of 8.3 times estimated 2024 earnings suggests there's some margin of safety in its valuation.
Throw in a 6.3% dividend yield, and the stock is attractive as a turnaround play in the housing market.
2. Owens Corning invests in a downturn
Speaking of the housing market, homebuilding and construction materials company Owens Corning recently decided to double down on the North American housing market with its agreement to buy exterior- and interior-door company Masonite for $3.9 billion.
Buying Masonite will add its door and door systems to Owens Corning's insulation, roofing, and building & construction composites. Meanwhile, management is undergoing a strategic review of its glass reinforcements business. Ultimately, exiting the latter will increase its housing focus as the glass reinforcements business sells into wind energy and other industrial end markets.
The deal makes sense from a cost synergy perspective (sharing supply-chain costs and sales, general, and administrative costs is intended to cut expenses by $125 million within two years). And there's an opportunity for revenue synergies. Owens Corning and Masonite sell to builders, contractors, distributors, and home centers, with the possibilities to develop sales to each other's customers.
The deal is also a display of long-term confidence in the U.S. housing market (Masonite generates 90% of its sales in North America). It could be an extremely opportune purchase if the market turns later in the year.
3. UPS should have a better 2024
Lower interest rates won't just help sectors like housing and automotive that are directly exposed; it will also support economic activity in general. That's a significant plus for package delivery companies like UPS. When growth is good, delivery volumes increase, and customers are happier paying for premium delivery options. The reverse is true when growth slows.
UPS suffered the impact of a slowing economy last year, and protracted labor negotiations also hit it. The negotiations weren't friction-free, and many customers diverted volumes from UPS for fear of a strike.
And added costs associated with the new contracts pressured profit margins. The result was a 29% decline in adjusted profit in 2023, and the company starting 2024 in weak shape.
Image source: Getty Images.
That said, many of the headwinds could turn into tailwinds in 2024. For example, UPS is already winning back customers and has an opportunity to do so throughout the year.
And the impact of extra costs will be lapped in 2024, leading to better profit margins later in the year. An improved growth environment, possibly from lower interest rates, will benefit UPS.
Lastly, management continues to grow revenue in its key targeted end markets, such as small and medium-size businesses and healthcare. With a 4.4% dividend yield and plenty of recovery potential, UPS is an exciting stock for long-term investors.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Owens Corning and United Parcel Service. The Motley Fool has a disclosure policy.
