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Introduction

In today’s volatile stock market, making informed decisions is critical. As a guide for investors, "Goodbye or Goodbye" offers insights that help cut through the noise, aiming for the best moves for your portfolio. This article discusses two stocks with significant exposure to interest rates, highlighting the benefits and potential drawbacks, featuring insights from Adam Johnson, the portfolio manager for Bullseye American Ingenuity Fund.

Stock Recommendation: Builder First Source

Why Builder First Source?

Builder First Source (BFS) is a prominent supplier in the home construction niche, and its stock has experienced a rollercoaster ride over the past year. Here are a few reasons why Adam Johnson recommends buying this stock:

Housing Shortage: According to estimates from Freddie Mac, there is a significant shortage of housing in the U.S., with a deficit ranging from five to six million units. This gap is partly due to slowed construction post-2008 financial crisis, making now an opportune time for companies like BFS that supply building materials.
Interest Rates are Likely to Decline: Lower mortgage rates will make home buying more affordable, fueling demand for new houses. Companies in the housing sector, such as BFS, are expected to benefit from this trend.
Stock Valuation: BFS stock is currently priced favorably, trading at about 10-11 times earnings. Although current earnings are down due to slower housing demand, projections for 15-20% growth next year make it a valuable pick.

Potential Risks

Despite the positive indicators, there are still potential risks:

Economic Stagnation: If the economy were to stagnate or fall into a recession, the anticipated demand may not materialize.
Inflation and Interest Rates: A spike in inflation could force the Federal Reserve to raise interest rates again, negatively affecting the housing market.

Stock to Avoid: Charles Schwab

Why Avoid Charles Schwab?

Charles Schwab stock has endured a highly volatile journey, particularly impacted by the regional banking crisis. Johnson advises against investing in Schwab for several reasons:

Earnings Decline: Schwab has reported declining earnings in the past six quarters. The acquisition of TD Ameritrade was expected to boost earnings, but it hasn't materialized.
Dead Money: Schwab stock has failed to reach its previous highs from two and a half years ago, indicating it's "dead money"—investors have not seen returns.
Stagnant Capital: An enormous sum of $ 6.1 trillion is sitting on the sidelines, not being utilized by Schwab clients who prefer the safe returns from government bonds.

What Could Go Right?

Although Johnson doesn’t see immediate potential, the best-case scenario for Schwab involves:

Market Rally: A significant market rally could lure the $ 6.1 trillion off the sidelines and back into Schwab brokerage accounts.
Rise of Schwab Stock: In a thriving market, investors might gravitate back to Schwab, believing it to be a natural beneficiary of overall stock market growth.

Conclusion

To sum up, Adam Johnson recommends buying Builder First Source due to the ongoing housing shortage, likely decline of interest rates, and favorable stock valuation. Conversely, he advises avoiding Charles Schwab due to its continued poor earnings performance and the large amount of capital parked in low-risk investments instead of being utilized. Remember, in the dynamic world of stocks, it is crucial to stay informed and strategic in your investments.

Keywords

Housing Shortage
Builder First Source
Interest Rates Decline
Charles Schwab
Dead Money
Earnings Decline

FAQ

Q: Why is Builder First Source recommended for purchase?
A: Builder First Source is recommended due to the prevailing housing shortage, expected decline in interest rates, and its favorable stock valuation.

Q: What are potential risks associated with investing in Builder First Source?
A: Potential risks include economic stagnation, which may diminish housing demand, and a possible rise in inflation, leading to increased interest rates.

Q: Why should investors avoid Charles Schwab?
A: Charles Schwab is currently seen as "dead money" with declining earnings for six consecutive quarters and significant client capital not being put to work.

Q: Is there any scenario where investing in Charles Schwab might be beneficial?
A: Yes, a major market rally could shift client capital from low-risk investments back into Schwab, potentially boosting its stock. Additionally, if Schwab benefits from an overall market rise, it could see advancement.