The Rate Cut Party is Postponed, Not for These Stocks

Key Points

• Stagflation in the U.S. economy has made timing Federal Reserve rate cuts harder than ever.
• One way to beat this economic phenomenon is to focus on stocks that could deliver above-average EPS growth. 
• Analysts land on these three companies to expect a double-digit upside as EPS growth beats the economy.

Over the past five months, the stock market may have gotten away from itself. The Federal Reserve has kept stock market indexes at historically high levels through its interest rate cuts narrative. However, these potential rate cuts may be later than investors initially thought.

There is a solid case to believe that the market may have already priced in these potential rate cuts, leaving little to no other stocks with further growth that has yet to be baked into their prices. That’s where three stocks stand out today, as Wall Street analysts believe they can still push out double-digit earnings per share (EPS) growth this year, whether rates get cut or not.

Companies like Micron Technology Inc. NASDAQ: MU, which has the technology stock rally to back it along with trends in artificial intelligence, fit the description today. Other stocks like Spotify Technology NYSE: SPOT, relying on their predictable cash flow models, and consumer discretionary-friendly Chipotle Mexican Grill Inc. NYSE: CMG are also places to watch.

Top Stock Picks to Navigate a Tough Economic Climate

Economists had to wake up to one of the most dreaded economic environments in history, with stagflation as a headline. Defined as low economic growth and high inflation, it is a sticky situation for economists to follow and even more challenging for investors to navigate.

Real economic growth is negative, with the U.S. gross domestic product (GDP) growth below inflation at only 1.6% versus 3.4%. To beat these trends, investors should focus on stocks that could push out above growth while providing relatively predictable demand.

Picking out the best stocks in this environment is tricky, so here’s where analyst ratings are helpful for investors.

Semiconductor Surge: Why Micron Technology is a Must-Watch for Investors

Rising demand for semiconductors worldwide is one of the most reliable trends investors can count on; as emerging economies help push technology demand from the semiconductor industry, analysts found a spot for Micron Technology on this list.

For the next 12 months, Wall Street analysts think EPS could grow by a staggering 2,306% rate. Analysts at Mizuho Financial are experiencing this potential growth, so they felt comfortable slapping a $150 price target on Micron, calling for up to 15% upside from where the stock trades today.

So-called ‘smart money’ is also excited about this potential upside with other A.I. plays outside Nvidia Co. NASDAQ: NVDA, as Lazard Asset Management boosted its stake in Micron by 4.6% as of May 2024, bringing its total investment to $168 million,

As the stock trades near its 52-week high, a new all-time high, investors count on bullish momentum as a technical factor helping the stock beat stagflation today.

Spotify's Subscription Revenue Set to Drive Stock Higher

Markets are unsure whether the Fed will cut rates this year, as the initial March 2024 timeline has been pushed to September (according to the CME’s FedWatch tool); some are losing confidence that cuts will help the market stay where it is.

One thing investors can count on is subscription revenue, where Spotify has a tight grip. No matter where rates go for the rest of the year, Spotify’s numbers will likely hover near their current level.

Spotify's monthly average user number grew by 19% over the year, and premium subscribers grew by 14%. Reaching 239 million subscribers gives Spotify the economies of scale it needs to deliver strong results.

Keeping up with inflation means raising prices by 2-4% on these subscriptions, an effect that – when multiplied by 239 million users – can bring on double-digit EPS growth. And that’s where Wall Street’s projections make sense, setting up for 41.4% growth this year alone.

Chipotle Forecast: High Margins, Reliable Growth Make it an Investor's Dream

Chipotle can be described as such, though it is also a sort of investor paradise. With reliable, noncyclical demand, Chipotle’s management has a tight grip on its capital cycle, allowing it to generate up to 15% in return on invested capital (ROIC) rates.

Chipotle’s financials also show a 40.8% gross margin, which is nearly unheard of in the retail sector. This high margin shows pricing power and consumer preference for Chipotle over competitors, and analysts considered this when valuing the stock.

Those at UBS saw fit to value Chipotle stock at $3,500, calling for up to 12% upside from its current price and reiterating that strong financials with the right mix of growth in steady demand call for a stagflation-beating stock.

With above-average EPS growth and double-digit upside left in analyst valuations, these stocks kept the rate cut party going for themselves, even if no one else is invited on rumors of no cuts this year.