Key Takeaways
- Falling interest rates can be beneficial for smaller-cap stocks, as they can lead to increased investment, lower debt burdens, and boosted consumer spending.
- The Bank of Canada and the U.S. Federal Reserve have recently cut interest rates, with more cuts expected in the future.
- Portfolio managers recommend investing in smaller-cap companies such as Cargojet Inc., QXO Inc., Stella Jones Inc., ITT Inc., A&W Food Services of Canada Inc., and Yeti Holdings Inc.
- These companies have growth potential, attractive stock valuations, and are well-positioned to benefit from falling interest rates.
Introduction to Falling Interest Rates
Falling interest rates can have a significant impact on the economy and the stock market. When interest rates fall, it can lead to increased investment, lower debt burdens, and boosted consumer spending. This can be particularly beneficial for smaller-cap stocks, which can be more sensitive to changes in interest rates. In recent months, the Bank of Canada and the U.S. Federal Reserve have cut interest rates, with the Bank of Canada cutting its key rate nine times to 2.25 per cent from 5 per cent since June 2024, and the U.S. Federal Reserve reducing its rate by a quarter of a point to the 3.5-to-3.75 per cent range.
Aubrey Hearn’s Picks
Aubrey Hearn, portfolio manager and lead for U.S. and small-cap equities at CI Global Asset Management, recommends investing in Cargojet Inc. and QXO Inc. Cargojet, Canada’s largest airfreight carrier, is a compelling investment due to its benefits from the e-commerce trend and its "stunningly cheap" stock valuation. The company has long-term contracts with customers such as Amazon.com Inc., DHL Group, and United Parcel Service Inc. QXO Inc., a building products distributor, is an attractive roll-up acquisition play led by entrepreneur Brad Jacobs, who has a successful track record of building companies. The company uses technology to drive efficiencies and is targeting $50-billion in annual revenue.
Jeff Mo’s Picks
Jeff Mo, portfolio manager at Mawer Investment Management Ltd., recommends investing in Stella Jones Inc. and ITT Inc. Stella Jones, North America’s largest manufacturer of treated wood, is an appealing investment due to growing product demand and its relatively attractive stock valuation. The company produces utility poles, railway ties, and lumber for fencing and decking, and is well-positioned to benefit from rising electricity needs driven by artificial intelligence data centres and replacing aging infrastructure. ITT Inc., an industrial conglomerate, is a compelling investment due to its growth profile and attractive stock valuation. The company’s products include brake pads, pumps, and connectors, and its end markets are often interest-rate sensitive.
Greg Dean’s Picks
Greg Dean, chief executive officer and lead investor at Langdon Equity Partners, recommends investing in A&W Food Services of Canada Inc. and Yeti Holdings Inc. A&W Food Services of Canada, a fast-food chain known for its burgers and root beer, has growth potential that is still underappreciated, according to Mr. Dean. The company’s stock has a 5-per-cent dividend yield and expected earnings growth of 10 per cent, making it an attractive investment. Yeti Holdings, a designer, retailer, and distributor of premium outdoor products, is an attractive investment due to its growth opportunities and diversified product line. The company is expanding internationally and has a capital-light business model with no debt.
Conclusion
In conclusion, falling interest rates can be beneficial for smaller-cap stocks, and portfolio managers recommend investing in companies such as Cargojet Inc., QXO Inc., Stella Jones Inc., ITT Inc., A&W Food Services of Canada Inc., and Yeti Holdings Inc. These companies have growth potential, attractive stock valuations, and are well-positioned to benefit from falling interest rates. As interest rates continue to fall, it will be important to monitor the impact on the economy and the stock market, and to adjust investment strategies accordingly. By investing in smaller-cap companies with strong growth potential, investors can potentially benefit from the falling interest rate environment and achieve long-term financial goals.