Recent market turmoil, with the S&P 500 losing 1.4% and the Dow struggling, has been exacerbated by comments from the Cleveland Federal Reserve and Atlanta Federal Reserve presidents. These hawkish comments indicate that higher interest rates are likely to remain in place for at least the next 15 months, extending into 2025.
The prospect of prolonged high-interest rates spells trouble for some stocks but offers promising opportunities for others. Here are two stocks that could benefit from this scenario:
Intuitive Surgical
Intuitive Surgical (NASDAQ:ISRG) is a global leader in robotic surgical systems, with over 8,042 da Vinci surgical systems deployed in hospitals and medical facilities as of June 30. In the second quarter of 2023, the company placed 331 da Vinci surgical systems, representing a 15% increase in revenue to $1.76 billion. Adjusted net income also surged by 22% to $507 million compared to the previous year.
What sets Intuitive Surgical apart is its business model, akin to the Gillette razor and blade model. After placing da Vinci systems, the company generated significant revenue from the sale of instruments and accessories. In Q2 2023, da Vinci sales contributed 22% of total revenue, with instrument/accessory sales at 61% and services at 17%. This translates to 78% of recurring revenue following the initial sale of these million-dollar-plus surgical systems.
The company boasts a robust financial position, with $7.13 billion in cash, cash equivalents, and investments and zero debt. This strong financial standing mitigates concerns of interest expense eating into operating profits. While higher interest rates may potentially slow system sales, the recurring revenue from instruments and services creates a resilient business model.
Texas Pacific Land
Texas Pacific Land (NYSE:TPL) transitioned to a C-Corporation in January 2021 after 133 years as a land trust. The company owns 886,000 acres of land in West Texas, a region rich in oil and gas resources. Texas Pacific Land generates income through various avenues, including royalties from oil and gas production on its land, the sale of water resources, easement revenue from infrastructure development, and land sales.
Though it’s a long-term investment, the company has a strong financial position, with $609.3 million in cash and cash equivalents, no debt, and free cash flow totaling $193 million in the first half of 2023, surpassing its net income by 103%.
Texas Pacific Land does face ongoing litigation with its largest shareholder, Horizon Kinetics LLC, but recent developments, including a Cooperation Agreement, indicate progress toward resolution. Despite legal expenses impacting profits, the company’s substantial land assets provide considerable potential value.
In the second quarter, Texas Pacific Land sold 43 acres for $1.4 million, implying a per-acre value of nearly $29 billion for its 886,000 acres of Texas land. This remarkable asset is worth keeping an eye on, given the company’s strong financial position.
Summary
With the expectation of high interest rates lingering until 2025, Intuitive Surgical and Texas Pacific Land present compelling investment opportunities, each with a unique business model and the potential to thrive in this environment.
Featured Image: Freepik @ pressmaster
Author Faith Yakubu 
