4 stocks to invest in ahead of the Federal Reserve’s interest rate cuts

Home furnishings stocks are rising or poised to rise thanks to their resilient business models and end markets. The business models produce significant cash flows and the end markets are demanding, affluent and not afraid to pay for quality. Because the growth outlook for these stocks has bottomed and growth is falling within forecasts, they could see substantial stock price gains before the FOMC cuts interest rates and gain an advantage when it does.

Williams-Sonoma is best of breed and underrated

Williams-Sonoma New York Stock Exchange: WSM the results highlight the quality and strength of high-quality home furnishings companies. The company beat on both top and bottom lines, producing a substantial margin improvement from selling at full price. Not all segments have grown, but the core Williams-Sonoma brand has and is expected to return to growth this year.

Among the report’s conclusions is that Williams-Sonoma shares are undervalued. Shares trade at 19X earnings with 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 and generates over 65% of its revenue digitally despite having a network of well-located stores. Pure eCommerce plays like Wayfair and RH double in valuation and pay no dividends. Williams-Sonoma’s yield is worth about 1.5% and distribution is growing.

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

Arhaus has issued a special dividend and may support future payments

Arhaus NASDAQ: ARHS had a similar quarter, with a contraction in activity offset by better-than-expected results, margin strength and capital returns. The company’s results are supported by its expanding showroom base, which creates leverage for a housing market recovery. Analysts do not expect much improvement in 2024. However, activity is expected to remain at current levels and the outlook improves for next year, when revenues are expected to hit a record compounded by a wider margin.

Highlights from the Q4 release include 2,000 basis points of outperformance on earnings, free cash flow and 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 free, able to fund its growth internally, and expects to produce profits this year and next, it could sustain payments in 2025 and 2026.

Wayfair is gaining market share and will soon be profitable

Wayfair NYSE: W The fourth quarter results highlight the growing number of customers and market share that make it well positioned for a recovery. Additionally, the company reports positive cash flow for the third consecutive quarter, reversing steep losses from the same period last year. The company is expected to produce profits this year and margin will expand significantly in 2025, roughly doubling this year’s forecast.

Analyst activity following the report is mixed but significant as consensus sentiment and price target are on the rise compared to last year and last quarter, with a possible 20% upside at the midpoint. A move to that level would take the market to a one-year high, on track for a multi-year high and a full reversal.

RH will release results soon and is likely to beat estimates

RH NYSE:RH will release fourth-quarter results later this month and will likely produce a solid report. Analysts have lowered the bar, forecasting single-digit revenue growth, but with shrinking margins. Considering margin strength across the industry, RH likely benefited from full-price selling and market resilience; the question is: by how much? As it stands, analysts are in wait-and-see mode, having issued no revisions since last year. They rate the stock a Hold and see it advancing 10% according to consensus.

Before you consider Williams-Sonoma, you’ll want to hear this.

MarketBeat tracks Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Williams-Sonoma wasn’t on the list.

While Williams-Sonoma currently has a “Hold” rating among analysts, top analysts believe these five stocks are better buys.

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