The Federal Reserve signaled it may make one cut in interest rates this year. Although it left rates unchanged after its most recent Federal Open Market Committee meeting, its post-meeting statement said the following.
“In recent months, there has been modest further progress toward the Committee’s 2 percent inflation objective.”
That gives analysts hope we may see one cut in 2024 with the Fed becoming more aggressive about cuts next year. I wouldn’t hold my breath, but it means there are several stocks at risk if the Fed doesn’t cut rates this year.
They tend to be ones more sensitive to making it more expensive to borrow money. While no business enjoys that, certain industries are especially vulnerable because of high capital costs or dampened demand for projects.
The three companies below are stocks especially at-risk of disruption by the Fed’s higher-for-longer policies.
SolarEdge Technologies (SEDG)
Residential solar inverter manufacturer SolarEdge Technologies (NASDAQ:SEDG) is particularly susceptible to elevated interest rates because it makes selling new solar installations more difficult. Shares of the inverter maker are down 52% this year and 84% over the last 12 months.
SolarEdge Technologies is the second-largest inverter maker behind Enphase Energy (NASDAQ:ENPH). Inverters An inverter converts a solar panel’s direct current (DC) into alternating current (AC) that can be used in a house. But solar installations are expensive and high interest rates jack up the cost even more dampening demand for them.
First-quarter revenue plunged 78% from the year-ago period to $316 million. Sales are also down 31% from 2022. The last time sales were this low was in 2019 before the pandemic. Although it is moving into the spring, which is typically a stronger month for installations, investors shouldn’t expect to see any appreciable gains. They might be up sequentially, but not year-over-year (YOY).
Look for SolarEdge Technologies stock to languish until the Fed makes good on its interest rate cuts.
Plug Power (PLUG)
Hydrogen fuel leader Plug Power (NASDAQ:PLUG) is doing little better than SolarEdge. Its stock is down 36% in 2024 and 74% over the past year.
Alternative fuel vehicles are suffering from a slowdown in demand as the electric vehicle (EV) industry is recovering. But green fuels like hydrogen have a tougher sell than battery electrics. There is even less infrastructure for refueling in place than with EVs and high interest rates make it more difficult for Plug Power to thrive.
The hydrogen fuel cell stock has had a host of issues confronting it over the years beyond interest rates that have hurt the stock. Yet, its decision to become a one-stop shop for hydrogen is particularly vexing.
Plug Power became a vertically integrated industry leader to drive the adoption of fuel cells. However, the capital-intensive nature of providing the technology and the infrastructure itself sets up high hurdles it is finding difficult to surmount. First-quarter revenue was cut nearly in half from last year, but its costs remained essentially flat. Net losses grew from 35 cents per share to 46 cents per share.
But, interest rate cuts should help. Having positioned itself as a one-stop shop, it is the sole vertically integrated green fuel stock in the industry. Investors might want to wait until 2025 for the series of interest rate cuts the Fed envisions before buying Plug Power stock.
American States Water (AWR)
Utilities of all stripes find high-rate environments difficult to navigate but water utilities like American States Water (NYSE:AWR) have been taking it on the chin. AWR stock is down 13% this year and 20% for the past year.
That’s because upgrades and maintenance to infrastructure can’t be held off because clean water is essential. Projects must be implemented regardless of the environment. The utilities are at the mercy of rate regulators to approve price increases. While the rate hikes do tend to eventually go through, they may be delayed a year or more inflating the utility’s borrowing costs and causing significant expense increases.
American States Water serves over 1 million residential customers across nine states. It also serves 11 military bases under 50-year contracts with the U.S. government. Unlike electric utilities that are also serving specialized markets such as data centers that are seeing phenomenal growth. Those utilities are implementing artificial intelligence technology to help moderate the costs of energy usage. It makes them coattail beneficiaries of the industry’s growth.
The saving grace is that AWR has paid a dividend for 86 consecutive years and raised the payout for 69 straight years. Investors can at least enjoy being paid to wait for the Fed to reverse its rate hikes.
On the date of publication, Rich Duprey held a LONG position in AWR stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.