The stock market continues notching new all-time highs. Sentiment is running hot amid the Federal Reserve’s new interest rate cutting campaign. In theory, lower interest rates could help boost demand for credit and give a major boost to sectors like housing and automobiles.
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Also, there is the perception that valuation ratios for stocks should expand as the cost of capital goes down. However, investors should still be prudent, as not all stocks and sectors will necessarily be able to support more generous valuations going forward. These five stocks to buy for October are all down year to date and stand out as more compelling values for investors looking to put money to work today:
— Toyota Motor Corp. (ticker: TM)
— Chevron Corp. (CVX)
— Charles Schwab Corp. (SCHW)
— Dollar Tree Inc. (DLTR)
— Rentokil Initial PLC (RTO)
Toyota Motor Corp. (TM)
The auto sector has had its share of macroeconomic worries in 2024, with Toyota stock in particular dipping almost 30% since March. Investors are nervous that high interest rates and a slowing macroeconomic outlook could cause a significant sales slump. In fact, in some categories such as electric vehicles, there have been significant price cuts to stimulate demand. Toyota’s world-class reputation and famed manufacturing efficiency should help it outperform in a more challenging market outlook, however.
While Toyota has been slower moving than rivals in electrified vehicles, it appears to have a credible plan in place to help close the gap. Toyota also has an excellent balance sheet, giving it more flexibility to adjust its vehicle lineup and ride out short-term economic weakness. Shares are now going for less than eight times forward earnings, and interest rate cuts could stimulate significant new vehicle demand in coming quarters.
Chevron Corp. (CVX)
Chevron is one of the world’s largest energy companies, with operations spanning virtually all parts of the globe. Chevron has an enviable position in the Permian Basin, and it is looking to grow oil production dramatically over the next few years based on its low-cost exposure to that region. Chevron’s extensive refining assets diversify its income streams and have become more valuable in the wake of the U.S. oil production boom.
CVX stock has meaningfully underperformed the market over the past year due to softness in oil and gas prices. The continued weakness of emerging market economies such as China have limited marginal demand increases for crude oil. However, with Chevron’s massive size and robust balance sheet, it has significant competitive advantages against other oil producers. Meanwhile, the company’s 4.4% dividend yield is one of the most attractive among large-cap blue-chip companies. As the Federal Reserve cuts interest rates, this should increase the appeal of Chevron’s rock-solid dividend.
[See 10 of the Best Blue-Chip Stocks to Buy]
Charles Schwab Corp. (SCHW)
Charles Schwab has had a volatile ride over the past couple of years. Shares plunged on heavy volume in 2023 amid the regional banking panic. This came about due to so-called cash sorting. This is a practice where brokerage customers shift cash from low-yielding accounts to higher-paying alternatives such as money market funds or fixed income exchange-traded funds (ETFs). This deprived Schwab of a sizable chunk of its interest income from client funds, and in addition, the firm saw mark-to-market losses on some of its investment holdings. The worst appears to be over for this phenomenon; the banking market has settled down, and falling interest rates should reverse some of the cash sorting effects.
Charles Schwab shares have sold off again recently as some analysts fret about the company’s chief financial officer transition, along with the fact that major shareholder Toronto-Dominion Bank (TD) sold 40.5 million shares of SCHW stock in August. These short-term jitters have created another buying opportunity for investors ahead of a more favorable interest rate environment.
Dollar Tree Inc. (DLTR)
Dollar Tree operates more than 15,000 discount stores in the U.S. and Canada with a near-even split between its Dollar Tree and Family Dollar brands. Historically, the company’s business model, with a mix of consumable items like food and more impulse-driven categories, have served it well. However, DLTR stock has plunged over the past year amid a challenging macroeconomic environment for its working-class customer base.
Inflation, along with dollar stores increasing prices, has also seemingly caused some shoppers to reassess Dollar Tree’s value proposition. Analysts are also worried about increasing competition in the discount store landscape. The good thing, however, is that the category has proven fairly sheltered from online competition. DLTR stock has fallen about 50% year to date, which has pushed this historically fast-growing retail franchise down to less than 12 times forward earnings.
Rentokil Initial PLC (RTO)
Rentokil Initial is a large British-based pest control business. It helps companies manage rodents, insects and other unwanted animals. Rentokil also has a substantial operation in the hygiene and sanitation space. Arguably, Rentokil benefitted from an increased focus on cleaning during the pandemic, and investors seem somewhat skeptical that this tailwind will persist.
The company’s revenue growth has decelerated this year, leading to a dramatic decline in the share price. However, Rentokil’s diversified business lines and exposure to the fast-growing Asian pest control market should give it significant upside over time. In addition, Rentokil has shown that it can build its business through smart mergers and acquisitions of smaller pest control and sanitation operators. Morningstar’s Grant Slade sees Rentokil as a 5-star value pick today, with shares being approximately 35% undervalued in his estimation.
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5 of the Best Stocks to Buy Now originally appeared on usnews.com
Update 10/02/24: This story was published at an earlier date and has been updated with new information.
