I’ve been wondering which FTSE 100 companies are the best shares to buy ahead of a hotly anticipated first interest rate cut, and last week I got some insight.
Markets expected consumer price inflation to hit 4.2% in January, but on Wednesday the figure came in at 4%. The FTSE 100 jumped as markets anticipated an earlier base rate cut, and blue-chips likely to benefit from lower borrowing costs jumped highest. I’ve picked out three stocks that did notably well.
The first was Persimmon (LSE: PSN). Like every housebuilder, it’s been hit hard by rising mortgage rates. The shares have crashed 41.82% over two years, and are up just 0.33% over 12 months.
A solid dividend
Last month, Persimmon posted a 33% drop in new home completions to 9,922 in 2023. However, that beat the 9,500 target the board set in November, while average selling prices rose 3% year on year to £255,750. Private sales prices rose 5% at £285,770.
Persimmon warned market conditions remain “highly uncertain” but build costs and mortgage rates should moderate once inflation and base rates fall
The stock looks cheap trading at just 5.74 times earnings. The double-digit yield has gone now, with shareholder payouts slashed 75% in March 2023, but today’s 4.22% yield looks more sustainable. I already have exposure to housebuilders via Taylor Wimpey but now I’d consider buying Persimmon too.
My next stock pick is very different: grocery fulfilment technology play Ocado Group (LSE: OCD). This home-grown tech was one of the whizziest growth stocks on the FTSE 100, but has taken a battering lately.
The Ocado share price raced ahead of itself, as investors looked past short-term annual losses in pursuit of stellar long-term gains. Then rocketing inflation discounted the real value of its future profits, knocking sentiment.
Ocado shares remain volatile, falling or rising faster than the market as a whole. On Wednesday, they outperformed.
Sales of £2.5bn in 2022 are forecast to climb to £2.75bn in 2023 and £3bn in 2024. However, 2022’s pre-tax loss of £500m may only reduce slowly, to £404m then £288m in 2024. It will be a slow push to profitability. Ocado remains risky but when rates are cut and the economy rebounds, it’ll be a case of risk on.
FTSE 100 recovery plays
Tesco (LSE: TSCO) shares also did well on Wednesday. I can only assume that markets are calculating that when interest rates fall, shoppers will feel better off and spend more at the country’s leading grocer. Input costs may fall too. Wage growth is beginning to slow, easing pressure on one of the UK’s biggest employers with 330,000 staff.
Tesco shares held up well during recent troubles, rising 11.83% over the last year. They’re not cheap trading at 12.53 times earnings, but they’re not too expensive either. The yield is bang on the FTSE 100 average at 3.91%, but nicely covered twice.
Tesco’s operating margins remain wafer thin at 2.3%, albeit forecast to rise to 4.2%. Again, falling inflation and interest rates should help.
We don’t know when the Bank of England will start cutting interest rates. Yet I think these three may potentially rise nicely when interest rates finally start to fall.
