These companies are far from being household names, but they could handsomely reward patient investors.
The stock market’s returns in recent years have been largely fueled by mega-cap technology stocks like Nvidia and Microsoft. However, we’re about to enter a new falling-rate environment, and this could create some especially compelling opportunities in smaller companies — including these two rate-sensitive companies that you might not be too familiar with.
An innovative infrastructure play with a big opportunity
There were a few excellent businesses that came onto the market during the 2021-2022 SPAC bubble, and Sky Harbour (SKYH 2.20%) looks like it is one of them. The company’s main business consists of building airport hangar campuses that serve the private aviation industry. The clientele consists of CEOs, celebrities, and much more — for example, D.J. Khaled often posts Instagram photos from his Sky Harbour hangar.
The company only has four campuses currently in operation, and there are 10 more in various stages of construction or development. Management has plans to grow to 50 airports in the medium term, and more beyond that.
Sky Harbour’s business has fantastic economics. The company expects 35% returns on project equity from its first 20 locations, and aims to add adjacent revenue streams, such as maintenance and aircraft brokerage, as it scales. Even though it’s a long way from getting anywhere close to its true potential, Sky Harbour already expects to be cash flow positive by late 2025.
Falling interest rates could help Sky Harbour’s business in two main ways. First, without getting too technical, commercial property valuations generally rise when rates fall and fall when rates rise. Second, Sky Harbour relies on borrowed money to build new airport campuses, and a falling-rate environment could dramatically improve borrowing costs.
Rate-sensitive real estate with tons of long-term potential
Howard Hughes Corporation (HHH -0.54%) is a unique kind of real estate company — it isn’t quite a land developer, isn’t quite a construction business, and isn’t quite a REIT. The company describes itself as a real-life version of the popular video game series Sim City, and that’s pretty accurate.
Specifically, Howard Hughes develops large-scale master-planned communities that are closer in scale to small cities than to the neighborhoods you probably think of when you hear that term. For example, The Woodlands in the Houston area is a Howard Hughes MPC, and so is Summerlin near Las Vegas. Not long ago, the company acquired 37,000 acres in the Phoenix area to develop a new community from scratch.
The basic idea is that Howard Hughes sells some land to homebuilders, who create residential neighborhoods. These neighborhoods create demand for commercial properties like office buildings and retail centers, which Howard Hughes develops and leases to tenants. The company will then sell some more residential land, and the cycle repeats — for decades. This is a business model that takes a long time to unlock the full value of its assets.
Howard Hughes has underperformed the market in recent years, and the biggest reason is declining values of its operating assets, a large portion of which consists of office buildings. Rising rates haven’t helped, either, pushing commercial property valuations down across the board.
Even with the declines, a conservative valuation by management estimates that the intrinsic value of the company’s assets is about $109 per share — about 45% more than the current stock price. Plus, falling interest rates could be a positive catalyst for the company’s commercial properties in the years ahead.
Both are built for long-term compounding
While I think these two stocks could be great performers in the falling-rate environment we’re likely to experience for at least the next year or so, they are all designed to be excellent long-term compounders. I own both stocks in my portfolio, not just because I think they are going to outperform the market in 2025, but because I believe they’ll be excellent long-term wealth creators.
Matt Frankel has positions in Howard Hughes and Sky Harbour Group. The Motley Fool has positions in and recommends Howard Hughes, Microsoft, and Nvidia. The Motley Fool recommends Sky Harbour Group and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
