Morningstar analysts, like many other experts, say that the Federal Reserve has completed its interest-rate hikes.
Also like many others, Morningstar economists expect the Fed to begin cutting rates next year. But Morningstar is more aggressive than most, anticipating an easing in the first quarter. The consensus calls for rate reductions to begin in the second quarter.
Related: Top stocks for total cash return: Goldman Sachs
As for Morningstar’s take, It sees the economy beginning to slow in the fourth quarter and continuing to slow in the beginning of next year, with inflation declining toward the Fed’s 2% target.
“I think the combination of those is what provides the Fed the room they need to start cutting rates sometime in the first quarter,” said Morningstar’s chief U.S. market strategist, Dave Sekera.
Stocks that benefit when interest rates fall
So which stocks might benefit from falling interest rates? Sekera cited four, all of which trade below Morningstar’s fair-value estimates.
Two of the picks are real estate stocks. Falling rates help real estate companies because they generally borrow money to pay for their properties. And lower bond yields make dividend yields from real estate stocks more competitive.
The other two picks are utilities, which benefit from falling rates for essentially the same reasons as real estate stocks.
Here are the fab four:
1. Realty Income
(O) -)
Morningstar moat (durable competitive advantage): none. Morningstar fair value estimate: $76. Friday price quote: $54.25. Forward dividend yield: 5.1%.
Realty Income is the largest triple-net-lease real estate investment trust in the U.S., with more than 13,100 properties that house mainly retail tenants. In triple-net leases, tenants pay for maintenance, insurance and real estate taxes. That means less costs for Realty Income.
2. Healthpeak Properties
(PEAK) -)
Morningstar moat: none. Morningstar fair value estimate: $33.50. Friday price quote: $20.30. Forward dividend yield: 6.1%.
Healthpeak focuses on life-science and medical offices. “Healthpeak has high-quality assets in top markets that attract credit-grade tenants in both segments,” said Morningstar analyst Kevin Brown.
“Despite the possibility of further changes to [Obamacare], we think any changes will result in a coordinated value- and outcome-based system that will provide Healthpeak with strong tailwinds.”
3. Entergy
(ETR) -)
Morningstar moat: narrow. Morningstar fair value estimate: $120. Friday price quote: $98.45. Forward dividend yield: 4.5%.
Earlier this week, Entergy agreed to power Monarch Energy’s planned 300-megawatt green-hydrogen electrolyzer in South Louisiana.
“We consider this another sign that Entergy will be a leader among U.S. utilities developing green-hydrogen infrastructure,” wrote Morningstar analyst Travis Miller.
4. American Electric Power
(AEP) -)
Morningstar moat: narrow. Morningstar fair value estimate: $97. Friday price quote: $80.20. Forward dividend yield: 4.1%.
“American Electric Power operates numerous utilities, providing investors protection from any one adverse regulatory ruling,” wrote Morningstar analyst Andrew Bischof.
“Nearly all of the company’s $40 billion capital investment plan through 2027 focuses on regulated investments, supporting annual earnings growth within management's 6%-7% target.”
The author of this story owns shares of Realty Income.
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