The New Fed Chair's Plan Just Changed Everything. (Most Aren't Ready)

The Fed just changed everything in the market this year. Is your portfolio ready to handle it? Joining us today is market analyst Thomas Hughes with a list of three stocks many investors will wish they owned if rates do increase later on this year. And Thomas, that's really what we are here to talk about first today is what came out of this Fed rate meeting this week and how the markets have kind of reacted. I I want to point out the markets are doing a lot of different things as we're recording this on Thursday morning. They closed on Wednesday, down quite a bit right after this Fed announcement. And then Thursday, we had some new Iran news that was starting to flip the market back to the green a little bit. So, we'll dive into all of that, but first, let's start out with what came out of this meeting on Wednesday that had the market reacting so strongly, >> right? It really just uh kind of confirmed what had been a suspicion, which is that interest rate policy was not going to go the direction this year that we thought it was. We began the year with the expectation for interest rates to continue falling. We had this incoming new Fed chief Kevin Worsh arguably a a dove and a lower interest rate, you know, person expecting to kind of drive those rates lower. But inflation has been persistently sticky and uh this latest meeting kind of confirmed that the Fed has got its eye out on inflation. They took out this the verbiage that kind of led led the market to believe a rate cut was coming and just kind of reinforced the idea that there could be a rate hike later this year. >> Yeah. And that's new news because many people again with this new chair were expecting the opposite to happen of either things to hold as they are or even the potential for a rate cut and like you said that going off the table uh means some different things for the market. So let's talk about the sectors that reacted uh strongest on Wednesday after this news came out and it felt like big tech might have had some of the biggest hits. Well, I would say just tech in general because higher interest rates just mean higher borrowing costs and right now the tech industry is borrowing money like mad to pay for data centers. So higher interest rates just means that it'll cost more to build out these data centers and that creates a headwind for the market. It creates a headwind for getting deals done. Could potentially slow down revenue realization and profitability over time. >> Yeah, I have more to ask on big tech, but one thing I want to talk about first right now is that prediction of what's to come. That's what the market is reacting on because obviously it has huge implications for big tech. But one thing Wars said in this meeting or in his announcement yesterday is to stop trying to predict what is going to happen at the Fed, whether rates are going to get cut or not. Just go off of the data that we have right now. And I think that that's a really hard thing to do because we've got this forward-looking market that is constantly looking ahead to what could come. And so let's talk about some of those indicators that we're seeing right now as far as forward looking and what the Fed could do. >> Well, right. So, uh, the most telling indicator is, uh, the CME's Fed watch tool. This is a gauge of the odds of, uh, interest rate hikes, uh, increases and decreases based on the Fed funds rate. Uh, Fed funds futures are a way for speculators to to gamble and bet on interest rate changes. Up until now, the market has been expecting to a fairly high degree um, interest rate declines. Earlier this year when oil prices began to spike, uh we saw an expectation for interest rates to begin increasing, start to creep into the outlook. Uh but this week that kind of really got amplified. Now we're looking at about a 35% chance for a rate hike, 25 basis points at the next meeting, which is in about 45 days, and an 85% chance by year's end. That's up from about 50% just a few weeks ago. But more importantly now, we're looking at a 50% chance for two 25 basis point hikes by year's end, which would be a big change to the fundamental outlook. >> Yeah. And those fundamentals are what we're going to talk about in this list of stocks that you have for us today. We're going to be looking at three stocks investors should have in their portfolio in a higher rate kind of situation. And again, you've got three specific names for us today that we're going to dive into. But Thomas, I want to talk first about the importance of diversification. We talk a lot about these tech names, these really high growth names on this show because it's what investors are interested in right now. And while those names are bringing really great returns for tons of investors, let's talk about the importance of diversification and where you stand on that. >> Well, diversification is is just smart. It helps to spread the risk around so that you know, no one trade, no one position can wipe out your your your whole account. It's just too easy to put too much money into one position and uh have it going real well, get greedy with it, add to it, and next thing you know, it's reversed on you and all those profits are gone. So, diversification is just smart. It protects your account. And in the end, it helps boost your returns because it's kind of hard to know which stock is going to be the big winner each year. So, you really need to kind of spread that money around and take some safe plays, but also some shoot for the moon plays. Uh not putting uh too much into anyone's sector or industry. >> Yeah. Before we get on to that first name on your list, Thomas, talk a little bit more about big tech and whether investors should still be in big tech, but more importantly, what you expect that tech sector to do if that first rate increase is announced later this year. >> Well, based on the market response, I believe that the tech sector will just continue to rally. Right now, the tech sector, I mean, it did sell off initially, but it's kind of rebounded. It's more flat for the week than anything else. I think that it is concerned, the market is concerned about higher rates, but I think in the face of uh the booming and the surging demand for AI, uh tech will just continue to rally no matter what. And there is also a wild card in play that might keep the Fed from cutting rates and that's oil prices. You know, the Iran conflict seems to be winding down. Uh there is some risk that oil prices will rebound just because capacity has been constrained so badly, but as it stands right now, oil prices are down well off of their highs. um undercutting uh what has been driving inflation for the last few months. So with that in play, the odds for um rate hikes could come down as the summer progresses. >> Yeah, I think maybe expect kind of a short-term knee-jerk reaction in tech if we do get that rate announcement coming at some point this year. But what you're saying or what I'm hearing anyway is don't expect a long lived downturn for big tech. You're not saying sell your tech stocks right now. There's still going to be growth here. And that's why we want you to take a look at this report, too. This is a list of Thomas' seven best AI stocks to own in 2026 that are really going to ride this AI mega boom no matter what happens in the economy. You can scan the QR code or click the link in the description to read more of those names and make sure you have some of Thomas' main AI picks in your portfolio too. But Thomas, let's move on to your more uh diversification list today and having some inflationfriendly rate cut friendly stocks also included in your portfolio. What's the first name you want to cover? Yeah. Well, these stocks are all kind of similar. They're all retailers, but they've all got kind of niche positions within the market, which uh provides them with some qualities that make them buy and hold stocks, inflation resistant stocks. One of them is a focus on essentials and necessities. Consumers will pull back on discretionary spending for sure, but over time, they're going to need to buy food and gas and toilet paper and toothpaste, and that's the kind of things that these companies sell. So that really limits the impact of economic downturns on their business, helps them ensure cash flow and capital returns over time. But the first one on the list is Ali's Bargain Outlets. Uh we've talked about Ali's before. It's a stock that the market really uh misunderstands. I think it gets lumped in and valued alongside of the dollar stores. Uh which it isn't. Ali's is more like the TJX companies. Um it's opportunistic. It's a bargain closeout retailer. It sells dailies and necessities. It's not locked into inventory the way that dollar stores are. They have to maintain certain items all the time. Ali sells what it can buy cheap and sell at a quality price that helps it drive cash flow and margin, provides um utility uh to its consumers, which helps it uh get and sustain market share over its competitors. >> All right, this one's a really interesting one. When you look at some of the data on this stock, the stock chart, it's all red. It's not a really great story here looking at where the price action on this chart is. But then you look at its latest earnings report. You also look at what analysts are saying about this stock and there's an interesting story here. Why do you think that we're seeing kind of different stories with what's happening in the the chart action versus the fundamentals behind the scenes? >> Well, right. So, what's going on with the chart price action is the uh the impact of the Big Lots acquisition. Big Lots went out of business. Ali's bought out a lot of the um the leases on a lot of the locations. That investment resulted in a lot of dark rent. It's paying rent on spaces that it's not using. So that impaired margins over the last year and that's why the stock price fell. But right now what the story is is the company is converting those dark spaces into Ali's formats. While it does so it's improving its revenue and also repairing its margins. So the story right now is accelerating growth, growth above targets and widening margins to drive cash flow and to help support the capital return outlook. >> So you're seeing uh the acquisition and these extra facilities and retail centers as a growth outlook rather than a drag down on the business. >> Well, right. So the the margin impairment is a is a near-term factor. As the company uh converts those spaces, it's going to grow at an accelerated pace. It's going to drive revenue leverage and also revert that that dark rent into, you know, revenue producing rent and also boost margins that way as well. >> Let's talk about analysts and what they are saying about the future of this stock. I think that's important to look at too because that consensus price target, the upside on this one looks pretty good from where it is right now. >> Well, right. So, the consensus is still pretty high and that just reflects the optimism of the market. the trend that's in place uh had been reductions and that was part of why the stock price has been declining. And then since the latest earnings report, what we've seen is uh some reiterated ratings and some set targets that are kind of reaffirming that the market has bottomed and that the outlook going forward will be for higher share prices. >> Uh let's look at specifically how Ali's is tied to a story of uh higher rates and potentially like that inflation story too. How does this stock work for fighting against those factors in your portfolio? >> Well, right. So, as inflation uh hurts consumers, it's going to push them into Ali's and help sustain that cash flow. So, within your portfolio, Ali's stock will experience less volatility. It'll see less downside when the market turns lower, but also be able to sustain that capital return and capital return growth over time, which provides leverage so that when the market resumes a more bullish posture and the rebound in the stock price will be more exaggerated. All right, an interesting first one to look at. Again, that chart action a little bit wild on this one. The next stock store you have for us is a little different. What's that second stock on your list? >> Um, that's Casey's General Stores. Casey's is more of a traditional retailer, but it's got a mode of its own. Um, it's expanding a chain of um convenience stores. It's also got a focus on rural locations, so it's got less competition. It's growing through acquisitions and consolidation and a highly fragmented market. Um, it definitely delivers necessities. It's got a real focus on inside sales and prepared foods which gives it a high margin. And it's got a really fantastic, really healthy balance sheet, able to self-fund its growth. Uh, so the story this year is that, well, in the previous year, they had pause share buybacks to preserve capital for an acquisition. So this year, that acquisition's been completed. Integration is going real smooth, real awesomely. They're growing above pace. They're widening margins. cash flow has been uh has been reverted back into capital returns and the share counts been uh has been falling over the last few quarters. So again, that's just a really powerful tailwind, powerful leverage for investors over time. >> All right, I get a little nostalgic hearing about Casey's showing up on this show today because I'm a farm kid from the Dakotas and yes, the rural factor in Casey's. These are all over the Midwest in these rural communities. It's why one of my family's favorite pizzas is Casey Pizza. I would love to hear from anybody in the comments. Do we have any other members of rural America who love their pizzas in there? >> Totally. Not surprised to hear you say that because the pizzas really they're mentioned in the reports frequently. Pizzas are driving force for inside sales. They're resonating uh and they're they're good. It's a good value. >> I think that's a big factor here. It's not just a convenience store. It's also kind of a fast food or the only fast food option in many of the locations that Casey has across the country. And it's clearly showing up in their earnings report. It's not only my family that appears to like Casey's pizzas and that convenience stores. They are doing really well in earnings. So I want you to talk about that a little bit more uh of just the kind of quarter that they had last quarter. >> Yeah. So they were expected to produce strength because they are are integrating uh the FS acquisition but it was well above expectations and and margins followed suit. One of the really highlighting factors for this company is they're operating their two segments which is gasoline and inside sales really separately. They've got two separate teams that are like laser focused on what they're doing. Gas margins have been really fantastically high, above trend, above average, really producing strong cash flow. And at the same time, the inside margins are doing the same thing. They're focusing on quality, keeping labor down, but also on those really high quality prepared foods that provide really high margins for the business. >> High margins are a good thing for sure. But I think as investors look at Casey's, there is one thing. It's also a high cost of entry. The stock price is pretty high right now. Even so though, analysts are still showing uh some upside on the consensus here. Do you think that there is a potential stock split or or anything in Casey's future? Because again, you're looking at just the sheer price tag on this stock as as quite a high cost of entry for your average retail investor. >> I do view Casey's as a stock split candidate. I've written about that several times. The stock price is trending higher. I don't expect it to stop just because it's growing. The balance sheet is really healthy and it continues to reduce shares. So altogether that just means that the shares are going to continue growing in value and that just means a higher and higher share price. I think right now we're up above $800. We're certainly in stock split territory. I'm at this level. We could look for I mean a 10 to one to a 20 to1 split to get that share price back below 100 bucks and back at levels where average investors and Casey's own employees can can buy shares on a regular basis. >> Yeah, I want to talk about the chart action a little bit too. We've seen some really uh sharp spikes and then some pullbacks in here too just in the last few months. What's behind some of those big moves? Is that just a market reaction or is that something actually with Casey's? >> Uh that's just natural market mechanics. It's it's the market hearing good news and digesting it. Uh the news being confirmed and reaffirmed by subsequent earnings releases and this the whole thing uh being rinsed and repeated. Uh this company, like I said, it's got a healthy balance sheet. It's able to self-fund growth. It's very smart about capital allocation. When it sees an acquisition target, it prepares for it, does it smoothly, as we've seen with the FS acquisition. Right now, the integration is has gone so unbelievably smooth. It's just like, wow, let's get another one going. Right now, it's just another one, another one. Right? So, that's all just part of the price action. I think over time we could get consolidations and pullbacks, but uh they're just going to present buying opportunities for investors. >> All right, one more thing with Casey's Quick, and that is that this one actually has a dividend. Is that enough of a factor that would also uh entice investors to to get into the stock or is it not much to speak of yet? >> Oh, it's absolutely a factor. The dividend helps increase the buy and hold quality. Uh the yield itself is relatively small, but what it does is help um funds and investors and um money managers who are tied to dividend producing stocks to be able to buy this company. And you can see that reflected in the institutional ownership which is also very high and provides a lot of support. Yeah, the dividend is just a nice plus for investors. And again, while the cost of entry might be a little bit higher on this one right now, you can always buy those fractional shares. And I think that's what I'm going to do as I add this one to my Bridget Buys watch list. I'm going to add the hometown favorite to this watch list. If you've watched our shows before, you know I have this paper trading watch list on marketbeat.com where I just add one stock per video that we talk about just so we can kind of follow along to see how the stocks we talk about on the show move over time. And as you look through my watch list, know that I am buying $100 of every stock that's added to the list and then seeing how that $100 grows over time. So for Casey's, I'm going to add $100 of the Casey's uh share to my watch list and see what kind of movement we see over time. Now, I wouldn't expect this one to be a parabolic 200% growth story, right, Thomas? Yeah, it's not going to be one of those skyrocketing stories, but I'll tell you, the Casey's that I've owned for the last couple years was in the red for maybe a day or two when I first bought it, but it's only ever moved higher since then. Uh there's been some brief pullbacks and some consolidations, but they haven't lasted very long. >> All right. Well, it's a good one to add to my watch list. I'm excited to see how this one moves over time. Let's get to the last name. And believe me, I also thought about adding this to my watch list cuz this is also one of my personal favorite companies. But I'm excited to talk about the stock, too. >> Right. The TGX companies. I enjoy this one myself. It's a good store to go walk around. You got to look and hunt and see what you're going to find. And you never know what you're going to see. I usually end up with something that I didn't intend, but at a good price. But so, the EGX Companies to me is like the premier buy and hold inflation fighting stock. It is the largest off-pric retailer uh um by market cap and by sales volume. It's taking shares from all the major retailers right now because of consumer headwinds. Consumer headwinds are keeping consumers from going to those name brand frontline stores and paying, you know, top dollars for name brand merchandise, but they still want name brand merchandise. They still want quality, but they want deals. And that's where TGX comes in. So, with the the the the frontline retailers struggling, there's plenty of inventory for TGX to buy. They're buying deals like mad. You can see that in their own inventory because that's relatively elevated but not badly so because of what they're able to buy which is you know branded merchandise that's in demand and they're able to turn it around and sell at a good margin. And so that's the story today is just taking share sustaining industryleading growth and solid margins that provide cash flow and enable these capital returns. TGX pays a dividend also buys back shares. Um, in the last earnings report, they provided a catalyst for share price by increasing the buyback authorization. Um, based on the trends and the growth and the forecast, I would not be surprised to see them increase the authorization again before the year's end. >> Yeah. Let's talk a little bit more about how this is tied to a potential rate hike this year and also how it helps to fight inflation. I feel like it's a similar story to what you discussed with Ali's, >> right? It's it's they're really all similar stories. Um, they're linked to consumers. Consumers are the driving force of the economy and when it comes to inflation fighting and the impact on consumers while they're being squeezed out of other purchases, they're going to be pushed into these retailers. We already see that in the trends, it's been the story that's been driving these companies for the last couple of years. And with inflation on the rise and rates expected to at least stay high, if not move higher, those trends are going to remain in place. >> Yeah. And earlier when you were talking about TJX, you mentioned some of the name brands stores that aren't doing well right now while TJX is. I'm just going to bring up one of them and that's Nike. You look at Nike's chart compared to what TJX is doing and they're completely different stock stories. Even though they're selling, you know, the same products, there's a lot of TJX brands selling Nike products. So, there's a demand story there. I think it is more of an economic story, too. >> Yeah. And Nike has its own woes, too. Uh Nike kind of shifted. It was a um a wholesaler was selling to wholesalers and it was um to retailers who were then selling the product. It tried to make the shift to direct to consumer which a lot of brands are doing. It provides higher margins but in so doing so it alienated its wholesale business and it hurt the business overall. So they've contracted. They've allowed themselves to lose share not only to TJX but to other shoe retailers like on holdings which is a fantastic shoe. It's definitely uh the rising star in the shoe business. So, as far as Nike goes, still a decent business. Uh but as you said, the frontline retailers, you know, not in a good position right now when you can get those same Nike shoes. Maybe not the exact one that you want, but Nike shoes at TJX for a good price. >> Yeah, it's an interesting story and it definitely speaks to what is happening with inflation in the economy right now and that consumer. Let's talk a little bit more about this specific stock though and for some investors who are looking for those stocks that are going to get them huge returns. They're very focused on tech names that we're seeing the tremendous growth in. What's the use case again for looking at a stock like TJX and making sure you have one of these three stocks in your portfolio for diversification? Even though looking at TGX analyst forecast where the the stock is right now, I don't think you're going to see those same 100% 200% returns on this one in the next year. >> Well, right. So TGX like Casey's is this rolling trend of growth and outperformance and capital returns that keeps the analyst in an upgrade cycle. So the analysts are raising their targets and the stock price tends to track along with them. So it's always fairly valued, but fair value is always rising. That's part of the growth, part of the cash flow, part of the capital return, the cyclicality of inflation and higher rates. Uh they will probably see an impact in lower sales and probably margin compression, but it will be less than other businesses. At the same time, their business will be more supported by trade down and value conscious shoppers to help sustain that capital return. So during those economic downturns and periods of higher interest rates, they'll still be reducing the share count, still be building leverage, still be growing their earnings, and still be driving that analyst uptrend. >> All right. So for those investors out there watching this saying, "I don't want stocks like these. I just want high growth stocks that have the potential to really pay off in the short term." What do you say to that? >> It's easy to look at those tech stocks and be like, "Wow, I really want to make 200% in 2 months. That's fantastic. I can retire." But chasing those stocks, I've lost so much money that it's just like, wow, I don't want to get my fingers burned again. Because then I go and look at TJX and I'm like, wow, if I have just put my money in that 10 years ago and forgot about it, I would be retired right now. So, if you don't want to buy these stocks, that's on you. If you want to retire more quickly than not, then I would buy some. >> All right. Always good advice, Thomas. And definitely a different story than some of the tech names we often cover. If you want to hear some other potential inflationproof stocks, make sure to watch this video. It's with Mark Likenfeld from the Oxford Club who is known for his dividend strategy.