4 Stocks to Buy Before the Fed Cuts Interest Rates

Key Points

• Home decor stocks will see a trough in 2024, leading to top-line growth and wider margins.
• Cash flow is solid, and capital returns can be found in this eCommerce group.
• Analysts sentient is warming and likely to produce a tailwind this year. 

Home decor stocks are rising or set to increase because of their resilient business models and end markets. The business models produce significant cash flows, and end markets are discerning, affluent, and unafraid to pay for quality. Because the growth outlook for these stocks has bottomed and growth is creeping back into the forecast, they could see substantial share price gains before the FOMC cuts interest rates and gain a tailwind when it does. 

Williams-Sonoma is Best-in-Breed and Undervalued

Williams-Sonoma’s NYSE: WSM results highlight the quality and strength of premium home decor businesses. The company beat on the top and bottom line, producing a substantial margin beat due to full-price selling. Not all segments grew, but the core Williams-Sonoma brand did, and a pivot back to growth is expected this year. 

Among the takeaways from the report is that Williams-Sonoma’s stock is undervalued. The stock trades at 19X earnings with the post-release pop, which is about right for a brick-and-mortar retailer, which Williams-Sonoma is not; not exactly. The company is a leader in eCommerce, making more than 65% of its revenue digitally despite having a network of prominently placed stores. eCommerce pure plays like Wayfair and RH trade double the valuation and don’t pay dividends. Williams-Sonoma’s yield is worth about 1.5%, and the distribution is growing. 

Williams-Sonoma’s capital returns will help support the action over time. The company increased the dividend payment by 25% and share repurchases by $1 billion because of the margin strength and outlook, which includes sustained high-single-digit growth and margins at the high end of the target range. The $1 billion in repurchases is worth about 6.5% of the market cap, with the stock at new highs. 

Arhaus Issued a Special Dividend and Could Sustain Future Payments

Arhaus NASDAQ: ARHS had a similar quarter, with business contraction offset by better-than-expected results, margin strength, and capital returns. The company's results are underpinned by its expanding showroom base, building leverage for a rebound in the housing market. Analysts don’t expect much improvement in 2024. Still, business should sustain itself at current levels, and the outlook brightens for next year when revenue is expected to reach a record compounded by a wider margin. 

Highlights of the Q4 release include 2000 basis points of outperformance on the bottom line, free cash flow, and the balance sheet. The balance sheet is debt-free and well-capitalized, allowing the board to authorize a special dividend. The distribution is $0.50 per share or about 3.3%, with the stock at $15. Because the company is financially unencumbered, able to finance its growth internally, and expected to produce profits this year and next, it could sustain the payments in 2025 and 2026.

Wayfair is Gaining Market Share, and Will Soon be Profitable

Wayfair’s NYSE: W Q4 results highlight the growing customer count and market share that make it well-positioned for a rebound. Also, the company is cash-flow-positive for the 3rd consecutive quarter, reversing steep losses in the prior-year period. The company is expected to produce profits this year and for the margin to expand significantly in 2025, roughly doubling from this year’s forecast. 

The analyst's activity following the report is mixed but telling in that consensus sentiment and price target are rising compared to last year and last quarter, with a 20% upside possible at the midpoint. A move to that level would put the market at a one-year high, on track for a multi-year high and complete reversal. 

RH Reports Soon and Is Likely to Outperform Estimates 

RH NYSE: RH is set to report its Q4 results later this month and will likely produce a solid report. The analysts have set the bar low, expecting low-single-digit top-line growth but with margins to contract. Given the strength in margin across the sector, RH likely benefited from full-price selling and market resiliency; the question is, by how much? As it is, the analysts are in wait-and-see mode, having issued no revisions since last year. They rate the stock at Hold and see it advancing 10% at the consensus.