Redfin (RDFN +0.00%), Upstart Holdings (UPST +2.10%), and Truist Financial (TFC 1.27%) are all in different businesses, but all three have come under pressure over the past year due to rising rates.
Wall Street received an indication that inflation is cooling and rates might not have to go higher, and it is providing a boost to all three stocks. Shares of Redfin are up 17% as of 11:30 Eastern Tuesday, while Upstart shares are up 14% and Truist is up nearly 7%.
The end of the rate hike cycle would be welcome news
The Federal Reserve hikes interest rates in an attempt to cool the economy, and all three of these companies have felt the impact. Shares of Truist are about 37% below their highs for the year, and Redfin and Upstart are both more than 60% below where they were just months ago.
But on Tuesday, investors cheered data that would suggest the Fed's tightening cycle might be nearing an end. Consumer prices were unchanged in October, according to the Bureau of Labor Statistics, and core inflation rose at the slowest annual pace since September 2021. That is better than the slight uptick that economists had expected.
It is dangerous to read too much into one set of numbers, and it will take a few more months of similar readings to really get a sense that inflation is under control, but there is good reason for investors to cheer these numbers. Truist, Redfin, and Upstart are all closely tied to the consumer, and the idea that the Fed was able to tame inflation without sending the economy into a full-fledged recession would be good news for their outlooks.
An end to rate hikes should also help accelerate business activity for all three companies. Housing sales have slowed due to higher mortgages. If rates stabilize, buyers will have a better idea of where the market stands, which could move some would-be buyers into the market. Similarly, consumer lending is more dangerous in a rising rate environment because borrowers can get overwhelmed by higher payments.
Redfin and Truist are both tied to the housing market, while Truist and Upstart also are involved in consumer lending.
NASDAQ: UPST
Key Data Points
With inflation cooling, are Upstart, Redfin, and Truist buys?
A lot of fear has been driving the prices of these stocks in recent months. Upstart and Redfin are disruptors in the credit assessment and real estate markets, respectively, and are unproven through a downturn. Truist is a large and established commercial bank, but investors have been on edge about the health of financial institutions after a series of high-profile failures earlier this year.
In all three cases, the rally Tuesday is as much a sigh of relief that things appear not to be getting worse as it is a signal that things will go straight up from here.
For long-term investors, Truist has the most predictable trajectory. The bank should have the wherewithal to weather any hiccups from here, and it still offers an attractive 6.6% dividend yield to those willing to buy in and ride out the storm. Even if next month's inflation data is not so rosy, it appears that we are far enough through the cycle that there will not be any more shocks to the system.
NYSE: TFC
Key Data Points
Upstart remains the most unproven of the three, with significant potential upside from here if its credit scoring system proves to be better than that of incumbent providers but significant downside if its loans do not perform as well.
Redfin is somewhere in between, large enough to have established itself in the competitive real estate market but still with work to do to prove it can generate outsize returns and elbow out traditional real estate brokerages.
All three companies are intriguing options. Investing in all three is an way to invest in a gradual easing of interest rates, with a mix of predictability and income from Truist and the chance for outsize growth if Upstart makes good on its potential.
