Investing
3 Stocks Down 20% Over the Past Six Months But Wall Street Thinks Will Pop 20% Or More This Year
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Most stocks have experienced a significant downturn in January 2025, with many indices reflecting a decline of around 20%. This drop can be attributed to several interrelated factors affecting investor sentiment and market dynamics.
One of the primary drivers behind the stock market’s decline is the Federal Reserve’s cautious stance on interest rate cuts. Following a series of rate reductions in late 2024, the Fed signaled a more hawkish outlook for 2025, projecting only two rate cuts instead of the previously anticipated four. This shift has raised concerns among investors about the potential for prolonged high borrowing costs, which could stifle economic growth and corporate profits.
Moreover, despite a slight improvement in core inflation reported for December, inflation remains stubbornly high, hovering around 2.6%. A number of Wall Street analysts have expressed concerns that persistent inflation could lead to further tightening of monetary policy, which would negatively impact stock valuations. Thus, the market’s reaction to inflation data has resulted in volatility, with certain stocks seeing steep downturns of late.
However, for those investors who believe interest rates will eventually come down, here are three top stocks to consider right now.
D.R. Horton (NYSE:DHI) is the largest U.S. homebuilder. As such, this company is often viewed as one of the most interest rate-sensitive names out there.
Interest rates imposed by the Federal Reserve indirectly impact longer-term bond yields, upon which mortgage rates are set. So, when interest rates climb (or growth and inflation expectations tick higher), mortgage rates also move higher. And given the fact that homebuyers are more likely to buy more homes (and more home with their dollar) in a lower interest rate environment, this recent uptick in interest rates has hit homebuilders like D.R. Horton in recent months.
Now, this is still among the more rate-sensitive names that’s performed decently well, all things considered. On the earnings front, the company recently surpassed fiscal Q1 2025 expectations despite a challenging housing market. D.R. Horton reported $2.61 EPS (beating the consensus forecast of $2.35 in EPS) and $7.61 billion in revenue, which was also well ahead of the $7.01 billion analyst estimate. In short, this is a homebuilder that’s showcased resilience despite slight year-over-year declines.
One of the ways D.R. Horton has done this is via leveraging affordability with smaller home designs and its Forestar land ownership model to sustain sales and cost control. Economies of scale continue to support increased efficiencies, while a strong financial footing has allowed the company to buy back significant amounts of stock. So, if the interest rate picture turns around, this company is an easy buy at its current multiple.
Lennar (NYSE:LEN) is another top U.S. home builder that’s got many of the underlying catalysts supporting its overall upside over the next year to five years.
The company’s recent earnings report reflected challenges from high mortgage rates and declining average selling prices, impacting home sales and new orders. However, the company adjusted pricing, incentives, and margins to address affordability issues but faced housing market uncertainties. Looking ahead to fiscal 2025, Lennar plans to adopt a volume-focused sales strategy and an asset-light, land-light business model to navigate market challenges.
Revenue for this segment fell 9.2% year-over-year to $9.55 billion. Notably, home sales contributed $9.5 billion (down 9%), while land sales dropped to $39.6 million from $63.5 million. Lennar’s deliveries decreased to 22,206 units from 23,795, with an average selling price of $430,000. This was down 2.5% due to incentives and product mix adjustments.
If Lennar can see some reversion in its home and land sales, coupled with an improvement in sales prices (tied to interest rates), this is a stock that could be poised for some significant upside from here.
After a tough 2024, Walgreens (NASDAQ:WBA) saw a rebound in early 2025, with the company’s share price actually performing quite well. This is a company that’s certainly seen 20% declines over a six year period in recent years, so I put Walgreens on the list. But it’s also a company with significant upside according to analysts, and it’s one that I think is well positioned for long-term growth, if the company can continue to execute on its efficiency plans.
Walgreens’ most recent stock price surge took place after the company reported better-than-expected results, with the retailer bringing in $39.5 billion in revenue for the quarter, far exceeding analyst estimates of $37.4 billion. Additionally, Walgreens reported adjusted earnings per share of $0.51, surpassing the $0.37 consensus forecast. Despite negative free cash flow of $424 million due to inventory buildup, Walgreens maintained its adjusted EPS guidance of $1.40 to $1.80 for the fiscal year.
Walgreens’ turnaround shows early progress, with store closures boosting same-store results and profitability expected to improve as loss-making locations are shuttered. Contracts for 2025 aim to ease reimbursement pressures, a key focus area. Trading at a forward price-earnings ratio of 7.7-times and an EV/EBITDA of 5, the stock appears undervalued.
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