In a shifting economy, there is an interplay between inflation, interest rates and economic data. Strategic maneuvering can lead to a difference between profit and loss. As interest rates may tumble, the possibilities create uncertainty across the investment space.
Three distinct entities have emerged as protagonists in this competitive scenario of adaptation and growth. Each is attached to a unique set of strategies and strengths. They may harness the return potential unleashed by declining interest rates.
The first one, focusing on optimizing homebuilding profitability, stands resilient against economic headwinds. Meanwhile, the second one reflects a knack for strategic capital allocation, boosting earnings amidst adversity. Lastly, the third one, with its prudent leverage management and high liquidity, offers stability amidst market volatility.
These stocks for falling interest rates reflect fundamental resilience and adaptability, which may lead to seizing opportunity against uncertainty.
Green Brick (GRBK)
Green Brick (NYSE:GRBK) has constantly attained industry-leading homebuilding gross margins. That has steadily increased over time. In Q3 2023, the company’s homebuilding gross margin hit a record high of 33.3%. That percentage surpassed its previous record set in Q3 2022. The trend highlights Green Brick’s capability to optimize profitability in its core operations.
The continuous improvement in homebuilding gross margins demonstrates the edge of Green Brick’s operational enhancements. It has a strategic focus on high-value locations and offerings. Despite a decline in the average selling price (ASP) of homes closed, the homebuilding gross margin remained unaffected. That suggests the company’s adeptness in managing costs and maximizing efficiencies. Thus, Green Brick’s homebuilding gross margins sequentially outperform those of its public homebuilding peers.
Moreover, Green Brick has experienced solid demand for its homes. It can be observed in increases in net new orders and home closings. In Q3, net new orders surged by 95% year-over-year, with year-to-date net new orders growing by 73% compared to Q3 2022. Hence, this growth rate represents the highest among public homebuilding peers.
Fundamentally, the company’s ability to derive solid sales orders suggests its infill and adjacent communities’ attractiveness, facing limited competition from the existing home supply. Moreover, demographic growth and in-migration in Green Brick’s core markets lead to sustained home demand, particularly among millennials and Gen Z homebuyers.
Finally, Green Brick’s management of its sales pace on a community-by-community basis derives optimal market responsiveness. Also, it reduces affordability issues arising from higher mortgage rates. The company may keep its competitive edge by offering incentives and adjusting pricing strategies while addressing buyers’ evolving demands and preferences. Therefore, it may boost Green Brick’s valuation under reduced rates.
Sixth Street (TSLX)
Sixth Street (NYSE:TSLX) achieves solid performance metrics supporting its valuations. For instance, in Q4, the company attained an adjusted net investment income (NII) per share of $0.62 and an adjusted net income per share of $0.58. For 2023, the adjusted NII per share was $2.36, with an adjusted net income per share of $2.66. The bottom line suggests consistent earnings growth.
Similarly, Sixth Street’s return on equity (ROE) is considerable, demonstrating efficient utilization of shareholder equity to derive a bottom line. In Q4, the company achieved an annualized ROE of 14.5% for NII and 13.6% for net income. Similarly, for 2023, the ROE stood at 14.4% for NII and 16.2% for net income. Hence, these levels reflect stronger returns compared to industry peers.
Fundamentally, Sixth Street’s edgy approach to capital allocation has contributed drastically to its performance. In detail, this strategic approach allowed Sixth Street to operate within its target leverage range while maximizing earnings relative to the cost of capital. Therefore, the company’s solid track record of sharp allocation of shareholder capital can be observed in its stock trading above book value.
Despite the adverse macroeconomic environment, Sixth Street’s portfolio remains in rocky shape. Key metrics such as weighted average revenue and EBITDA of core portfolio companies increased by 6% quarter-over-quarter. The company also maintains a deliberate asset allocation strategy, with 91% of its portfolio holding first-lien senior secured loans to businesses with underlying solid unit economics. Additionally, exposure to recent vintage assets, comprising nearly 40% of debt investments, boosts its portfolio quality and lowers risk.
Finally, there is only one non-accrual portfolio company, non-accrual, representing less than 1% of the total portfolio by cost and fair value. Thus, Sixth Street’s risk management may boost its market value in a normalized rate scenario.
Oaktree Specialty Lending (OCSL)
Oaktree Specialty Lending’s (NASDAQ:OCSL) strong origination activity and solid earnings are the fundamentals in motion. For instance, in Q1 fiscal 2024, Oaktree Specialty Lending had an adjusted NII of $0.57 per share, although it was slightly down from $0.62 per share in Q4 2023. Despite the small decrease in NII, the company experienced a solid increase in new investment commitments.
The company was at $370 million in Q1 2024, against $87 million in Q4 2023. Oaktree Specialty Lending’s capability to maintain solid earnings despite fluctuations in NII indicates resilience and adaptability in its investment strategies. Thus, the considerable increase in new investment commitments suggests solid origination activity.
On the other hand, nearly 30% of Oaktree Specialty Lending’s portfolio was turned over in fiscal 2023. It was a trend that continued into Q1. The configuration of Oaktree Specialty Lending’s investments has shifted productively (from September 30, 2022, to December 31, 2023). Here, the first lien investments lifted from 71% to 78%, and the second lien investments were reduced from 16% to 8%. Fundamentally, the high portfolio turnover rate suggests the company’s agility in capitalizing on market demand and optimizing its portfolio.
Furthermore, Oaktree Specialty Lending maintained a net leverage ratio of 1x at Q1’s end, constant with Q4 2023. The company had $908 million available on its credit facility and $112 million in cash, with a total dry powder of approximately $1 billion. The company’s leverage remains within its targeted range of 0.9x to 1.25x, with total debt outstanding at $1.66 billion.
Finally, OCSL’s conservative leverage and ample liquidity position it at the edge to pursue investments and navigate short-term volatility. Overall, the availability of massive amounts of dry powder indicates a readiness to capitalize on dislocations in the market.
As of this writing, Yiannis Zourmpanos held a long position in OCSL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.