There's reason to believe interest rates may decline in 2024, and that usually means it's a good idea to start investing in some interest-rate-sensitive stocks. In that line of thought, here's a look at why UPS (UPS +0.34%), Tesla (TSLA +7.62%), and machine vision company Cognex (CGNX 1.73%) are good ways to play this theme.
Why rates could fall next year
I'll start with a few words/charts on why rates could be lower. A quick look at the recent inflation data shows a continuation of a downtrend that began in the summer of 2022.
US Inflation Rate data by YCharts
The data was good enough to lower market interest rates, with the benchmark 10-year Treasury rate falling. In addition, note that one-year and two-year rates are notably lower than the six-month rate, implying that the Federal Reserve target rate will be lower in one year than in six months. 
10-Year Treasury Rate data by YCharts
While there's no guarantee the bond markets are right, history suggests higher interest rates, over an extended period, will result in lower inflation.
UPS
This stock will suit investors looking for solid returns and some income. UPS will benefit from the effect lower rates will have on the economy. That should result in increased volumes, or at least increased levels of the delivery volumes that management targets. In addition, there's likely to be a positive margin mix impact as customers stop shifting to lower-cost delivery options the way they have been doing in the rising rate environment.
While it's true that UPS enjoyed a couple of boom years during the pandemic (as lockdowns drove customers into buying online), and according to Wall Street analysts, it won't get back to 2022 levels of sales of $100.3 billion until 2025, there are a couple of favorable things to bear in mind.
First, analyst forecasts have UPS generating earnings of $9.71 a share in 2024 and free cash flow (FCF) of $7.1 billion, putting the stock at 16.7 times 2024 earnings and less than 19 times FCF in 2024. Those are reasonable multiples for a stock that will be in volume recovery mode in 2024.
NYSE: UPS
Key Data Points
Second, UPS is achieving good traction in its goal of growing revenue in targeted markets like small and medium-sized businesses and healthcare. As such, it will emerge from the slowdown with a better revenue quality than when it entered it. Throw in a 4% dividend yield, and UPS is a solid choice for investors in 2024.
Tesla
Like UPS, Tesla will likely have a stronger underlying business coming out of a rising rate environment. Yes, Tesla is an automaker, meaning rate movements will impact its sales; consumers usually buy cars on credit, so monthly interest payments are a crucial part of the decision.
In contrast to the internal combustion engine (ICE) market of recent decades, the electric vehicle (EV) market is not a low-single-digit type growth market; it's high-growth and relatively early-stage. That distinction impacts the decisions CEO Elon Musk has made this year.
In response to rising rates, Tesla reduced prices to keep cars affordable and maintain market share while enabling volume growth. It's much documented that preserving market share is a crucial aim of a company in the early innings of a multiyear growth market, but what's less discussed is the importance of volume growth in reducing Tesla's cost per unit vehicle.
Image sources: Getty Images.
Volume growth justifies investment in facilities and technology that enables cost per unit vehicle cost reductions. For example, its average vehicle cost decreased from $39,500 in the fourth quarter of 2022 to $37,500 in the third quarter of 2023. That's a major plus in enabling Tesla to produce affordable cars. It stands in good stead to win market share when ICE-heavy manufacturers like Honda and General Motors cut back on plans to produce lower-cost EVs.
With lower rates, Tesla can raise prices and benefit from margin expansion after cutting its cost per vehicle on its established cars.
Cognex
This machine vision company will suit enterprising investors looking for a beaten-up stock with plenty of growth potential. Higher interest rates hit Cognex's main end markets by slowing consumer electronics sales (which impacts investment in developing new production lines that use machine vision) and ICE sales (ICE automakers are pausing investment as well). Slower consumer sales exacerbated the correction in e-commerce warehouse automation spending from the boom of previous years.
Image source: Getty Images.
All these issues hit Cognex in 2023, and its nine months of sales were down by 16% compared to the same period last year, with net income down a whopping 36%.
That said, lower rates will help all these end markets, and all it will take is a few large orders from, say, consumer electronics companies (Apple is a Cognex customer), automakers (ICE, EV, and EV battery manufacturers), or e-commerce companies and the narrative and growth trajectory of Cognex will look dramatically different than it does now.
