The latest consumer price index (CPI) report is in, and it's not what stock market bulls wanted.
Month over month, consumer prices rose 0.6% in August, their fastest monthly increase this year. And year over year, prices were up 3.7%, accelerating from the 3.2% recorded in July and moving away from the Federal Reserve's goal of 2%.
Gas prices were a major culprit, up 10.6% due to production cuts by OPEC. But even core CPI, which excludes food and energy, was up 0.3% in August and 4.3% year over year, still too hot for the Fed's liking.
The news makes it more likely that the Fed will raise benchmark interest rates at its meeting next week and that rates will stay higher for longer since central bankers have communicated several times that their primary goal is to bring inflation down to 2%.
Higher interest rates are generally a negative for the stock market because they make it more expensive for companies to borrow and pay back debt, and make bonds more attractive as an alternative to investing in stocks.
However, not every stock is a loser due to higher rates. Let's look at two that could benefit from them instead.
Image source: Getty Images.
1. Airbnb
Airbnb (NASDAQ: ABNB) might seem like a surprising choice since the home-sharing leader doesn't have direct exposure to interest rates.
However, the company does profit in an important way from higher rates. When you book on Airbnb's platform, the company collects payment and holds it until your booking starts, at which point it remits that payment to the host. That period of time often lasts months, and while the company holds the cash, it invests it in money market funds and short-term bonds to earn interest.
With interest rates up, Airbnb earns more on those investments, and they are now making a substantial contribution to its bottom line. In the second quarter, the company generated $191 million in interest income, or 28% of its pre-tax income of $676 million.
For the first half of the year, it made $337 million in interest income, which was equal to 41% of its pre-tax income because the first quarter is its seasonally weakest, with the lowest profits of the year.
Investors shouldn't confuse that income with profit from the core business, which is more important over the long term, but the interest income is a meaningful advantage by giving the company extra cash to reinvest in the business or buy back stock. It's also an income stream that competitors like hotel chains don't benefit from.
2. Dream Finders Homes
The sudden spike in mortgage rates, which are now hovering around 7% for 30-year fixed loans, has led to a strange phenomenon in the housing market. Homeowners, having taken advantage of low rates during the pandemic, are reluctant to sell and move, which would mean losing out on their low mortgage rates.
With more homeowners staying put, there's a meager inventory of existing homes on the market, meaning prospective homebuyers have had to buy new homes, turning to homebuilders to make that happen. That's led to a boom in homebuilder stocks, and among the biggest winners this year is Dream Finders Homes (NYSE: DFH), whose shares have tripled this year on the jump in new-home sales.
Dream Finders saw revenue jump 19% in its most recent quarter to $943 million. New orders rose 16% to 1,655, and it has a strong backlog of 5,288 homes, valued at $2.5 billion, or about three-quarters' worth of homes to build.
Dream Finders looks like a good bet in the homebuilding sector because it is outgrowing its larger peers. The company also operates mostly in the Southeast region, which is seeing strong population growth and a tightening housing market following a pandemic boom.
The company has also grown with the help of acquisitions and could take advantage of strong demand in the housing market to buy out smaller homebuilders in a highly fragmented industry.
Overall, sustained high interest rates will help fuel continued demand for new homes, benefiting Dream Finders. As a further incentive, the stock looks well-priced at a price-to-earnings ratio of 10.8.
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Jeremy Bowman has positions in Airbnb. The Motley Fool has positions in and recommends Airbnb and Dream Finders Homes. The Motley Fool has a disclosure policy.
