The TSX Index recently rocketed to hit a new high after the U.S. Federal Reserve decided to follow through with what can only be described as a jumbo rate cut. Indeed, lower interest rates are good news for stocks.
Though such a surprising cut could signal that the economy may be in a more fragile state than originally expected, I think the overwhelmingly positive market reaction could be just the start of the next leg of the broad bull market. Indeed, lower rates make future earnings worth that much more, acting as a sort of boon for growth stocks.
Additionally, low rates are also good news for those capital-intensive firms, many of which can jolt their growth rates or return a bit more to investors via share buybacks or more generous dividend hikes.
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Rate cuts finally touch down in the U.S.
Of course, let’s not forget that consumers may be inclined to take on greater consumer debt if rates are lower. In any case, investors don’t seem at all worried about the economy following the Fed’s latest cut, which marks the beginning of the end of its lengthy battle against high inflation.
With inflation normalized in Canada (in that 2% sweet spot range), questions linger as to whether the economy will hold up (soft landing) and if the disinflation (the falling rate of inflation) we’ve witnessed will continue. Should inflation close in on 0% or lower (deflation would surely be welcomed by cash-strapped consumers), perhaps central banks may have more room to cut rates.
Either way, investors should look to readjust their portfolios to play the newfound falling-rate environment in the U.S.
In this piece, we’ll check out one Tax-Free Savings Account (TFSA)-worthy stock to pursue as rates fall and inflation continues to fade.
Alimentation Couche-Tard
Shares of Alimentation Couche-Tard (TSX:ATD) have been in a bit of a hangover since news broke of its interest in scooping up Seven & i Holdings, the parent of 7-Eleven. Undoubtedly, Couche-Tard is known for driving synergies from M&A activities. And though 7-Eleven would be a deal of epic proportions, investors are no fans of the potential debt and dilution a successful deal would entail.
I thought the proposed takeover offer for 7-Eleven entailed significant value for Couche-Tard. The assets would be worth a heck of a lot more in the hands of Couche-Tard’s leaders, at least in my humble opinion. For now, Seven & i wants a better offer (likely more than $40 billion) to be acquired in a friendly manner. Given the challenges faced by 7-Eleven and complexities involved with Japanese takeovers (Japan reportedly labeled Seven & i as “core” to national security), I’m inclined to view the odds of a successful takeover as significantly lower.
There are just too many hurdles to get the deal done. Further, ATD shareholders don’t seem to be fans of a deal, given the price action in recent weeks. Either way, ATD stock is unfairly in a correction right now. If Couche-Tard ends up walking away from the deal, I expect shares could find themselves at all-time highs in a hurry.
Low rates are a massive boon for the company as it explores other opportunities worldwide. With or without 7-Eleven, Couche-Tard is a fantastic growth company that could finish the year with a bang. TFSA investors, take notice!
