Investors are already probing stocks to buy after April’s inflation fell more than projected last week. According to the CPI report, both core and headline inflation figures are trending downward. Consequently, hopes that the Federal Reserve will eventually start cutting interest rates are improving.
Lower interest rates generally have positive implications for the stock market. They reduce borrowing costs, allowing leveraged trading at cheaper rates. Investors also tend to take on more risk during periods of lower interest rates.
This partly explains why growth stocks often outperform when central banks are poised to cut interest rates. While the overall stock market typically rises as monetary easing allows more cash flows into equities, some sectors and specific stocks are more likely to outperform.
Tech has led the stock market higher this week, helping the Nasdaq hit a new record. Tech companies in the Artificial Intelligence (AI) spectrum could benefit going forward. However, we should also explore other stocks to build a diversified portfolio that delivers returns that can exceed the broader market.
Since it is rather gratifying as a trader to achieve market-beating returns, three such stocks to buy are named below:
Carnival (CCL)
While cruise lines may not traditionally be seen as fast-growing sectors, Carnival (NYSE:CCL) is one of the top stocks to buy for investors with an appetite for recovery plays.
As the largest cruise line company, Carnival faced immense challenges during the COVID-19 pandemic, with over $34.5 billion in accumulated debt. However, lower interest rates could make debt servicing more affordable, increasing the company’s overall value. Furthermore, reduced borrowing costs may stimulate demand for cruise vacations as consumers feel more comfortable using credit cards.
The Carnival stock currently trades well into growth territory. Its price-to-earnings (P/E) ratio stands at 50.3x as the company recovers from losses. While Carnival slowly returns to profitability with four consecutive EPS beats, its stock price has yet to match earnings growth.
Despite paying no dividends, analysts believe the Carnival stock is undervalued relative to earnings growth potential — the consensus price target points to a 25% upside to an average of $20.82 per share.
Tradeweb Markets (TW)
The online trading platform Tradeweb Markets (NASDAQ:TW) is one of the go-to stocks to buy for Wall Street professionals looking to trade stocks, bonds, commodities, or any other asset. Bond trading volumes increased 70% year-over-year (YoY) in April.
Lower interest rates and a potential resurgence in meme stocks driven by retail traders could boost already high volumes and continued market share gains. The company’s high profit margin of 28.5% is indicative of strong pricing power likely to benefit further from interest rate cuts in the near future.
With a 59x P/E ratio, the Tradeweb stock is considered a growth stock that pays a small dividend of 0.4%. Similar to many well-known tech stocks, Tradeweb saw 32% earnings growth in the first quarter.
Analysts remain optimistic about the company’s EPS growth exceeding 30% this quarter as it continues expanding into different asset classes and regions. In comparison, the S&P 500 is expected to grow only 6.6%.
Meta Platforms (META)
An AI company could not be missing from a list of stocks to buy as inflation slows down. Meta Platforms (NASDAQ:META) is an interesting option to consider. While the company spooked investors earlier this year with plans to invest heavily in AI research and development (R&D), this strategy could fuel substantial long-term growth.
Large capital expenditures pose risks for the bottom line during times of high interest rates. However, borrowing costs will reduce if inflation decreases and interest rates fall soon. Subsequently, returns on Meta’s AI investments will increase as consumers have more disposable income.
Meta generates massive free cash flow (FCF) each year, adding $44 billion to its coffers in 2023 alone. While the company has started paying dividends and conducting share buybacks, significant growth upside potential remains.
Trading at a P/E ratio of 27x, Meta stock appears attractively valued relative to other growth stocks. Its current valuation is well below its historical P/E average of 37.1x.
On the date of publication, Stavros Tousios did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
