Motley Fool Hidden Gems Investing - When Rates Move, Who Wins?

Episode Date: August 26, 2025

Lower interest rates are more than a macro headline - for some businesses, what the Federal Reserve decides to do plays an integral role for both management and investors. Today on Motley Fool Money, analysts Emily Flippen, Jason Hall, and David Meier debate the stocks most likely to be impacted after Federal Reserve Chair Jerome Powell’s speech at Jackson Hole Companies discussed: WD, RKT, GRBK, O, PYPL, ABNB, PAYC, TSLA Host: Emily Flippen, Jason Hall, David Meier Producer: Anand Chokkavelu Engineer: Bart Shannon Disclosure: Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, “TMF”) do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. Learn more about your ad choices. Visit ⁠⁠megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

We're breaking down the businesses that stand to benefit most when borrowing gets cheaper today on Motley Fool Money. I'm Emily Flippen, and today I'm joined by analysts Jason Hall and David Meyer to discuss the industries and businesses that are actually impacted by interest rates. After last week signaling from Federal Reserve Chair Jerome Powell at Jackson Hole, that we'll likely be looking at at least one rate cut this year, it's fair to ask what the real impact may be. We'll touch on bond proxy stocks and financials, but to start, real estate. Now, Dave, you've talked a lot in the past about how homebuilder sentiment has

reached new lows, but mortgage rates are directly tied to Federal Reserve policies, and many argue that all it would take is a few basis points and lower rates to really quickly ignite that real estate demand. Do you think that actually will come to fruition, especially given the other environmental impacts that we're seeing today? I think it'll take more than a few basis points, but directionally, I think this is correct. I mean, lower interest rates help home builders in so many different ways. First, the lower rates make it easier for potential buyers and that defects demand. So yeah, with lower rates, you could see demand rise. Plus, the other thing is, right now, home builders are giving lots of incentives away in order to get people to make a purchase within a higher interest rate environment.

So, lower rates could actually mean less builder incentives and potentially more profitability for the builder on a per-build basis. So clearly buying and building houses are big decisions and they take time, but I think lower rates being a catalyst for additional building can help other macro variables over time as well. One thing about home builders that's important too is they're also big consumers of debt and usually for long periods of time because they buy land that they hold for multiple years and they finance that land because they just don't have a bunch of cash laying around. So it helps them on both ends of their balance sheet and operating statement. That's a good point, Jason. But I'll play devil's advocate here too, which is to say, we still see affordability at all time lows. And I don't know if there's necessarily going to be, we presume that there's a bunch of people sitting on the sidelines waiting for interest rates to come down or home builders sitting on the sideline waiting for interest

rates to come down to build. That prices will actually move further down. Even if interest rates come down, it's possible that we still have people even with lower interest rates that are priced out of the home market entirely. That's exactly right. I will say this as a person who has bought two new homes, their builders are always reluctant to give on price. So price is not something they typically use in the negotiating table. I can understand why. Jason, you've analyzed economic measures as part of your research process for years. Housing accounts for nearly a third of all the goods and services that are part of our consumer price index. Nearly 20% of total GDP all comes down to housing. So needless

to say it's pretty important, but not all of that impact is home building. Actually, a majority of it is things like housing services, which is just a fancy way to say like rent that in my opinion, and I think in my experience is arguably less impacted by interest rates. So how should one think about that segment of the housing market within the context of rate changes? Yeah. So we think about CPI and a lot of times when it comes to something like rent, we don't think about the rents that people already have a contract for that's priced in, you're still rolling in that existing lease agreement. But we think about the people that are out looking for a new place. And it's like, wow, this costs a lot more than it did a couple

years ago when I was looking for an apartment. But I think what we forget too is that interest rates actually do affect rents in a bigger way than we realize because the vast majority of commercial real estate is financed. So those rates are there. Walker & Dunlop, which is a major player in multifamily residential real estate finance, put some really good information in their presentations and their Q2 earnings presentation. One of the things that they showed was that back in 2021, there was more than $250 billion in capital raised for private real estate investments. Last year, $125 billion. So we're talking half as much. What changed? Interest rates. Real estate uses a lot of debt to fund those deals. So as an investor, one of the trends worth following

is the amount of cash sitting on the sidelines for real estate. So $100,000 estimates there's about $400 billion in dry powder, so to speak, that's kind of nearing the end of its investment period in real estate funds. It's a lot of money that could be deployed into more supply in the years ahead. That could accelerate. And I think that could be good on the supply side. Maybe not bring prices down, but as people's incomes go up, maybe people's incomes go up faster than the prices will go up. And that could help some with the affordability. Fair point. But I have to ask, how does this all accrue to value for investors? Are there certain stocks or industries, home builders, REITs? I mean, there's so many different ways to play these trends.

Yeah, I'll start. I have to wonder if rocket companies, ticker RKT, wouldn't be a big beneficiary of lower rates. So, it has a mortgage origination business. And that would actually stand to benefit both on the home building side, but on the resale transaction side. And speaking of transactions, it just acquired Redfin, the home selling platform. So, unfortunately, the Rocket's stock price is up pretty sharply off the April lows. And perhaps some of that is in anticipation of rates falling. That's been talked about for quite a while. But that's where I'd be looking for sure for opportunities. Yeah, David, another part of Rocket that's set to benefit is not just the writing of the mortgages,

but their servicing business, which is set to get a lot bigger with another acquisition that's in the pipe there too. So I think that's an interesting one. But I'll make the case for home builders, if you're targeted, looking at the ones that are really good originators. In other words, they're good about buying land in areas that it makes sense. They get a good price. And they're really good at building and pricing their products. Greenbrick Homes, I think, is a good example. Ticker GRBK. It could benefit a lot. I don't think second half of this year. I think this is like a multiple-year trend because lower rates should prove to be a boost. I think there is pent-up demand. Despite the lack of affordability

for a lot of people, there are still plenty of people that make plenty of money in the right geographies where there's economic opportunity are interested in green brick could benefit. I think REITs like Realty Income, ticker O, already has really good access to lower cost capital. It's an advantage against a lot of its competitors. It's set to get a boost in a way we don't necessarily think about as an investor. They have a lot of debt already and they're going to have to refinance that debt as it matures. Lower rates means that they're going to be able to refinance at a little more appealing rate than they would have gotten, say, a year ago. And that means less money having to go out the door to pay those finance costs and more that

they get to retain to grow their dividend. So Jason, with those two ideas, are you saying quality is not a function of the rate environment? Those are good, high quality businesses. That's the key, right? That's exactly it. It's throwing ideas at the wall and chasing return is one thing. Focusing on quality still matters, maybe even more in this environment, because that's where you get the sustained benefits of this and not just a little bit of bump because you're chasing what you read on Wall Street Bets. And you can even make the argument that interest rates in general are always going to be some element of cyclical, which is to say they will go up and they will go down over time in a typical cycle. And while it's hard to predict exactly what

that looks like, the thesis for our company and an investment should be so much bigger than just what is the current interest rate regime or where do I see the interest rate regime going? It should be doing something that's likely to provide long-term value outside of the factors that they don't have control over, like interest rates. Yeah, that's exactly right. We'll circle back potentially to REITs and some other dividend-paying investments at the end of the show. But up next, we're digging into how interest rates can impact financial stocks. Stick with us. You've got to try breakfast at A&W You've got to try breakfast at A&W

And what better way than with a delicious Pret Organic Coffee Starting with just $1 all day, every day, now until December 31st You've got to try breakfast at A&W At participating A&W locations in Ontario financials that's the segment of the market made up of companies like banks insurance companies even some fintech businesses they're perhaps one of the most obvious industries that gets hit by interest rates after all when rates go up interest income for these companies tend to rise but at the same time consumer credit costs rise and loan growth can stall so for some of these companies

that can turn into a double-edged sword jason do lower interest rates really benefit banks and other financial institutions, given the possibility for those lower net interest margins? There's definitely a tension between interest rates and borrower demand. I think that's more important than anything else. Obviously, in the high end of the low end, higher rates don't matter if nobody can afford them. And rates that are too close to your capital costs. So for banks, what do you pay for depositors and interest bearing? And then you think about companies that borrow money, and then they lend money in some way. You have to pay for it. There's the margin between it, right? So they just don't work if the math doesn't work. But small rate

cuts, they can unlock some pent up demand for large purchases like homes and cars. And that new loan activity can be worth more than the risk of lower yields cutting your margins. I mean, think about it like this. If you can earn an extra $25 million in margin at a lower gross margin rate, you take the extra $25 million, right? So the dollars are what pays the bills. So I think that's the key. Your net interest income moving higher is what matters. The percentages matter on the margins. But if you can issue more loans at the lower rate, you take the larger amount of loans. Yeah, that's nicely said. It's more of a volume game as opposed to a pricing game for a lot of these companies. And even if it means that you end up getting a lower margin on the sales

that you're making, if you're doing a larger volume of sales on a dollar basis, the bottom wine still grows. Yes. I will also say in my experience, the rates that they charge for their loans may not fall as quickly as the rates that they get for the money they borrow. So you could in a very, again, very short period of time, you could get a little incremental boost that way because it might take some time for that signal to flow through the market that sets the rates for the consumer, for the buyer. Dave, I also want to talk to you a little bit about the fintech sector. You follow this industry. And I know that you see a lot of growth at a reasonable price opportunities with some potentially smaller cap companies in the space. But even big companies

like PayPal, Block, and Affirm, they're all being impacted by higher rates. And management really likes to parrot that lower rates could reduce consumer borrowing costs. They could drive transactions higher. But again, in my experience, those lower rates tend to come at a time when the economy is showing weakening signs, which isn't typically great for consumer spending and I think could be a headwind for some of these platforms. Where do you fall on that? So typically, you're right. When there is a slowdown in the economy, we see monetary policy move towards reducing rates. And the idea there is to try to prevent demand from falling too far. Demand is what drives GDP. That's what people think about when they buy things. So that's the

idea, at least when the environment is poor, lower rates, spur buying, let's keep the economy from shrinking too much. But there are obviously other factors at play, right? That control spendings, job security, consumer confidence, inflation, we could name a whole bunch more. What's interesting is today, I think the rate cut chatter is more about just trying to get the economy to grow faster. And in the short term, that should be beneficial to much of the fintech sector via a bump in demand. What that means is more people wanting to buy stuff and having multiple options to pay for it. So, you named a few, right? I can use PayPal. If I want to do buy now, pay later, I could use a firm, things like that. And so, it will be interesting

to see how this all plays out. But I actually think in today's environment, a short-term cut is positive for that entire industry. Beautifully said. Up next, we're moving over to bond proxy stocks and how interest rates impact high yield investments. We'll see you after the break. In Toronto, every arrival is a statement and nothing says it better than this. Cadillac Optic was the number one selling luxury EV in Canada for 2025. Find your rhythm across a seamless 33-inch display and an immersive 19-speaker AKG surround audio system. This city demands agility and Optic delivers with precision to make every drive? Extraordinary. Let's take the Cadillac. Find out more at cadillaccanada.ca. Luxury sales

claim based on S&P Global Mobility Canadian New Vehicle total registrations for calendar year 2025 for the Cadillac definition of luxury. Now moving over to a segment of the market that many believe stands to benefit the most from rate cuts, bond proxy stocks. These are companies that kind of act like a bond, some would argue a lower risk, high yielding investment, things like utilities, telecom and dividend players. Dave, in a high-rate world, dividend stocks, they lose luster in some sense compared to treasuries, right? I mean, 3% dividend yield sounds great until you're comparing it to a risk-free 5% from the government. And then all of a sudden, I'm not so interested in buying that company anymore. So we've actually seen a pretty

substantial underperformance of dividend-paying stocks in recent years. How much of that is impacted by rate cuts? And do you think potential rate cuts could make these types of investments it's even more attractive. So, yeah, I think that's right. Actually, it's a little weird, but I think the rate cut could make them a little bit more attractive. So, in a rate cutting environment, the market tends to gravitate towards smaller companies and growthier ideas, right? So, what that could mean is that there is, quote unquote, less demand for dividend payers. People just don't want them, right? There's something else that's going up. Let's chase that. But dividend payers really aren't really for outperforming the market, right? They're like

bonds. They're more for protecting capital and getting a little sent back to you each year. But for some, that actually might be more attractive than treasuries because those stocks could actually get a little bit of capital appreciation. So, you might get a little boost in all of this, right? You might get a little less yield, but you could get a little more capital appreciation. So, it's possible to outperform what they were doing before, but I think it's always difficult for dividend payers to outperform something like the S&P 500 index. It's a good thing that we don't have Matt and Ant here listening because they might have a bone to pick with it. But Jason, I know this is something that I've talked about with

Matt and Ant previously on Motley Fool Money, which is that the number of dividend-paying companies in the U.S. markets has fallen substantially. And you can make the argument that this is a potential impact of rate changes and just dividends being less attractive to investors, or if there's just a broader changing appetite from investors for high-yielding investments. What are your thoughts? I think it's a combination of two things that are very interrelated. If you look at what's happened, it's really a couple of decades in, but in terms of the investor win, really coming out of the financial crisis, this explosive growth of technology companies, software as a service, along with low interest rates. And those things

kind of fed each other because the capital flowed into VC, which was funding, because there was no return to be earned in bonds. Really, again, coming out of a great financial crisis. So we talk about this within the context of the pandemic. We need to go back another decade to really tell the full story of this low interest rate environment. So all this money flowed into VC and VC became very institutionalized. We're talking massive amounts of money that would normally have maybe been in bonds or other income investments that went to VC that stayed there for decades. This funded so many of these software companies that have made the corporate world more efficient and more profitable and have unlocked other growth opportunities for those

businesses, which have allocated their capital towards those growth opportunities instead of returning money back to dividends. Share repurchases have continued to happen at very high levels. But the dividends, like you said, have really, really largely gone down. So those two things kind of created one another. We're in a weird place now, though, because you go back to end of 2021, then 2022, when interest rates really skyrocketed. What's happened since that VC and private equity, they're having a lot more trouble raising capital than they did prior to that. Because you can get 5% risk free again, right? So you see how this kind of comes full circle. So I think that 20 teens, like Cambrian explosion of software as a service, and now we

have AI, guys, that's software. It's all kind of funding the same thing and driving this growth and extremely high levels of corporate profitability that we've never really seen before. And it's just changed the environment. The last thing I'll add to that is we have an entire, because of this, we have an entire generation of retail investors who made their money on stocks and saw bonds as this not worth it thing to invest in. So now we have hundreds of billions of dollars of capital, even for people that are retired, that made their money in stocks that are not interested in shifting to fixed income. So it's this kind of weird dichotomy that we're dealing with. But I think we started to see a little bit of a shift, but they're so interrelated,

it's hard to really say it's one thing or the other. Speaking anecdotally, I think I'm part of that generation of investors. I'm 30 years old. And if I have dividend paying stocks in my portfolio, it's by sheer accident, not through any sort of conscious capital allocation on my part. I've always looked down on companies that pay dividends in some sense. Because in my mind, it's effectively like saying, I can't figure out a better place to put this money to work. So we're giving it back to you and you can figure it out. I want my management and my leadership team for companies to have ideas about where great places to invest are. That's why I gave them my money in the first place. Don't send it back to me.

But clearly, maybe the interest rate regime will change my opinion on that no longer when I'm not looking at a 5% risk-free, right? That's right. As we sign off here, let's do one last quick lightning round on other stocks or segments that really care about interest rates that we didn't get to today. I'll start and I'll say companies that hold client cash. And I think this is such a big risk for investors because it's unrelated to their core business. Using Tesla, just as a quick example, they have a lot of these auto regulatory credits that come and generate basically tons of net profit for the company

that's unrelated to the manufacture, production, and sale of electric vehicles. They're software companies that effectively do the same thing, except for instead of dealing with regulatory credits, they're dealing that with client cash. And Airbnb is perhaps the most salient example. Lots of people pay upfront when they get an Airbnb. Airbnb holds onto that cash and they earn returns and net interest on the cash that they're holding for clients. And over the course of 2024, the interest income from client cash generated around 30% of their total profits for the year. And that's unrelated to their core platform offering, right? And that's the sort of risk that I think some investors don't factor in when

considering lower interest rates is that Airbnb, Paycom, other software services that receive cash up front, these are businesses that in part generate a fair portion of profits just off interest income. Airbnb has float. Who would have thought it? Who would have thought it? Dave, what about you? Small caps. Smaller companies face lots of challenges on their way to trying to become bigger companies by growing their revenue and cash flow. Lower rates makes capital, which is just way more crucial to a smaller company than a larger

company, a little less expensive. So what that can mean, perhaps they can fund a project or make an improvement to a product that helps them grow that they didn't think they could fund before. So all, all things being equal, I would definitely look within the small cap sector for opportunities when, when, when rates are falling. I'm going to invert this a little bit. I'm going to do my best Charlie Munger and say, what are industries that can be heavily affected by this in positive ways that don't necessarily become more investable? Um, so I'll go from Munger to Peter Lynch here who once wrote roughly, uh, even a great company in a mediocre industry is still a

mediocre company. In recent decades, besides Tesla, find me a massively market-beating successful investment in the automaker space. You really can't. They're very rare. It's a brutal price-taker industry, very low margins, capital-intensive, end-user demand that's very cyclical. And even Tesla, the one success, hasn't really been a great investment in recent years. And what success it has had has been tied to the story things, future bets around AI, autonomy, and robotics, not the EV business. Let's be honest. It's kind of struggling right now. So I think any investments, any benefit investors see from falling rates in that industry, let me paraphrase Jerome Powell

and say, it's probably going to be transitory. I love that note to end on. I mean, I think that summarizes the takeaway from today's show, which is that, yeah, it's true. Lower interest rates can lift a lot of boats, but for some certain stocks or some certain segments that actually can make or break the investment. And for other businesses, maybe automakers in this case, where it can drive demand, it doesn't actually change the long-term thesis for a lot of investments. That's right. Jason, Dave, thank you both so much for joining. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for Oregon, so don't buy or sell stocks based solely on what you hear.

All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Jason Hall, Dave Meyer, and the entire Motley Fool Money team, I'm Emily Flippen. We'll see you tomorrow.