The U.S. stock market could now be at a pivotal point, which some may call a top. After potentially pricing in the proposed Federal Reserve’s (the Fed’s) interest rate cuts, the broader market indexes could be set up for a major disappointment. Stubborn inflation rates have postponed these rate cuts from an initial date of March 2024 to what seems to be September or later.
Because of this, specific key data indicators, such as the commitment of traders report (COT) and the Fed's balance sheet, show signs of a significant rotation; investors can now also rotate their views and preferences for the market before the trend becomes too apparent.
The primary strategy involves exposing portfolios to as much growth as possible while keeping the economy's fundamental reality in mind. This avoids being part of the 'priced in' stocks that have potentially exhausted their buyer base.
Fitting this profile, mid-cap stocks like SentinelOne Inc. (NYSE: S), SolarEdge Technologies Inc. (NASDAQ: SEDG), and even SoFi Technologies Inc. (NASDAQ: SOFI) could be great watchlist additions, and here’s why.
Why is The Tortilla Flipping
Once expecting interest rate cuts in March 2024, the CME’s FedWatch tool shows traders betting on these potential cuts by September. There’s only a 48.5% chance of a 25 basis points cut… Yikes.
The Fed is in a tight spot, as the manufacturing and services sectors are mutually contracting while still showing expanding readings in their pricing segments. This relationship creates an environment feared by economists: stagflation.
Defined as a period of high inflation coupled with slow economic growth, the U.S. economy is starting to fit the profile. Posting 1.6% gross domestic product (GDP) growth with sustained high inflation, investors and consumers have only one way to escape this scenario: above-average growth.
Three Mid Caps Set to Rally
Large-capitalization stocks are not known to deliver this type of growth. Still, investors can take the shares of Walt Disney Co. as an example. After reporting better-than-expected first-quarter earnings, the stock declined by more than 9% in the trading session.
Falling prices on the face of good news typically mean the market has run out of buyers. Any further buying (likely chasing growth) could find themselves chasing the growth normally tied to mid-cap stocks like the ones mentioned here.
1. SentinelOne
Operating in the cybersecurity space, this stock aids the transformation in the digital economy, where remote workers and the digitalization of businesses will need to call on the industry to remain compliant with security regulations and requirements.
Because of the company’s $6.7 billion size, growth may not be an issue. Wall Street analysts think the stock could deliver more than 100% EPS growth this year. Because it trades at only 70% of its 52-week high today, price targets propose a double-digit upside to its shareholders.
Analysts at Morgan Stanley think the stock could go higher by 33.6% from where it trades today, or so does the bank’s $29 a share price target for SentinelOne stock.
Following this sentiment, the Vanguard Group boosted its position in the stock by 2.1% in the past quarter, making its stake $643.9 million in the company.
2. SolarEdge Technologies
As oil prices push beyond their $ 80-a-barrel ceiling, fossil fuels become a more expensive energy source for businesses and consumers. As a result, alternative sources of energy—like solar—become more attractive propositions to invest in and adopt.
This is why analysts see up to 230% EPS growth for SolarEdge stock this year. Like SentinelOne, the stock’s price action creates an easy opportunity for analysts to stand out in their bold valuation predictions.
Trading at only 19% of its 52-week high, this stock calls for a 66.3% upside in its consensus price target of $97.6. Again, the lack of bullish price action wasn’t enough to keep the $1.6 billion of institutional inflows from coming in, as the stock is now 95.1% institutionally owned.
Being a $3.4 billion company has benefits, and triple-digit growth in the middle of stagflation is one of them.
3. SoFi Technologies
Warren Buffett is betting on a U.S. residential construction boom, especially after realizing that current homeowners won’t let go of their cheap mortgage rates in the middle of today’s 7.5% average 30-year fixed rate.
At the same time, the average home price is 32% higher than before the COVID-19 pandemic, so would-be homebuyers aren’t lining up to finance a more expensive home today.
According to Buffett’s bet, the way to break this stalemate is to build and inject new housing inventory into the market, which could help normalize prices. If the timing of this new construction ties in with the Fed’s cuts, mortgage demand could affect the economy.
According to analysts, this is why SoFi's EPS could jump by as much as 200% this year. Jefferies Financial Group analysts' $12 price target suggests an upside of 70% from where the stock trades today.
Because the stock trades at 60% of its 52-week high, investors could see this double-digit upside be more of a reality today.
