Historically, cyclical stocks tend to outperform the rest of the pack when the Federal Reserve (the Fed) lowers interest rates to make money cheaper and financing more flexible for both businesses and consumers. You can see this in consumer discretionary stocks like Lululemon Athletica Inc. (NASDAQ: LULU), which outperformed the broader S&P 500 by 122.3% in 2020-2023. History could repeat itself, or at least rhyme in the upcoming cycle with proposed rate cuts.
In the next few months, consumer tailwinds will push Wayfair Inc. (NYSE: W) alongside a new boom in real estate. Today's economy keeps people too busy to go out and pick up furniture for their new homes, so Wayfair's business model shines.
Tailwinds at play
Warren Buffett initiated a position in homebuilder stocks in the fourth quarter of 2023, in names like D.R. Horton Inc. (NYSE: DHI) and PulteGroup Inc. (NYSE: PHM). His investments reflect the market turning bullish on Wayfair stock.
According to the CME Group (NASDAQ: CME), most open mortgages in the U.S. today carry an average interest rate of 3.25%, significantly lower than today's elevated rates of 7.3% for a 30-year fixed mortgage. More than that, the average home value sits at $492,000, up from roughly $383,000 pre-pandemic (that's 28.5% higher).
Not only are mortgages near all-time highs, but so are prices, which makes a double obstacle for anyone considering buying a home today. Likewise, most homeowners probably aren't looking to get rid of their 3.25% mortgage only to have to look for a home at a new 7.3% rate.
Homebuilding stocks could help normalize prices a bit to allow for new buyers to come back, and mortgage rates could decrease now that the FED has proposed interest rate cuts this year. Here, you can begin to see some of the reasoning behind Buffett's buying, expecting not only a construction boom but also a new wave of real estate transactions, but is it too late for you to get in?
Juice to squeeze
You can look at the trend in consumer discretionary stocks, which you can watch in real time through the Consumer Discretionary Select Sector SPDR Fund (NYSEARCA: XLY). This sector has underperformed the broader S&P 500 by 6% over the past six months.
The market had aggressively priced interest rate cuts for March this year. Still, according to the FedWatch tool at the CME Group, things look more like May or even June rate cuts. This disappointment led markets to rotate out of some consumer names, leaving plenty of opportunity for names like Wayfair.
Wayfair stock trades at only 57% of its 52-week high; all the while, it is set to grow its earnings at clips that no other competitor even comes close to.
Most will be looking to add a position to the more prominent names like Amazon.com Inc. (NASDAQ: AMZN), Etsy Inc. (NASDAQ: ETSY) or eBay Inc. (NASDAQ: EBAY); however, these are not specialized platforms like Wayfair.
Now that you know the specific trends in real estate inventory, which comes in big, furniture will enter shopping carts once it buys new homes.
Analysts are bullish on the future EPS for Wayfair since specializing in the one thing that could boom during this new real estate cycle will pay off big. EPS should grow by 170% over the next 12 months, head and shoulders above Amazon's 29%, Etsy's negative 1.5% and eBay's 5.7%.
Analysts projecting massive growth have landed on a consensus price target of $74.10 a share, calling for a 42.4% upside from where the stock trades today.
