In this article, we discuss 10 stocks to buy amid rising interest rates. If you want to skip our detailed analysis of these stocks, go directly to 5 Stocks to Buy Amid Rising Interest Rates.
In late January, Jerome Powell, the US central bank chief, told reporters at a news conference that the Federal Reserve was preparing for a “sustained battle against inflation” and would raise interest rates in March and bring bond purchases to a halt the same month. However, Powell reasoned that the hike would take place only if the “conditions are appropriate for doing so”. The Fed plans to use these policies to bring down inflation to around 2%. In late 2021, inflation in the US had climbed to multi-decade highs of close to 7%.
The Powell announcement served to further dent the growth stocks market. Amid rising inflation and speculation around interest rate hikes, investors had already been pulling their money out of “overvalued” businesses and stowing it away in companies that offered some kind of near-term value to shareholders. Some examples include JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corporation (NYSE:BAC), and The Home Depot, Inc. (NYSE:HD), among others discussed in detail below.
As interest rates rise, the finance sector stands to benefit the most as it increases the earnings of major banks almost overnight. The rise in interest rates generally tends to lead to a fall in home prices but external factors, like the millennial first-time home buyers, looks likely to overcome this obstacle in the coming months. The falling unemployment numbers are also adding to the impetus for a rise in interest rates. As the job market booms, the extra earnings could result in more spending on items other than retail, like appliances and cars.
The companies that are best positioned to gain from a rise in interest rates were selected for the list. Special importance was given to the finance, retail, and home improvement sectors. The business fundamentals and analyst ratings for these firms are also discussed to provide readers with some additional context for their investment choices.
Data from around 900 elite hedge funds tracked by Insider Monkey in Q3 2021 was used to identify the number of hedge funds that hold stakes in each firm.
Stocks to Buy Amid Rising Interest Rates
10. PACCAR Inc (NASDAQ:PCAR)
Number of Hedge Fund Holders: 26
PACCAR Inc (NASDAQ:PCAR) makes and sells commercial trucks of different sizes. As interest rates rise, finding new financing for trucks will become more expensive. As the fourth quarter earnings results of PACCAR Inc (NASDAQ:PCAR) indicate, the demand for new trucks remains robust. This led to a record pre-tax income growth of $306 million for PACCAR Inc (NASDAQ:PCAR) in the fourth quarter of 2021, up 38% year-on-year. PACCAR Inc (NASDAQ:PCAR) introduced three new truck models last year.
This is why top hedge funds hold large stakes in PACCAR Inc (NASDAQ:PCAR). Among the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Harris Associates is a leading shareholder in PACCAR Inc (NASDAQ:PCAR), with 1.5 million shares worth more than $121 million.
Just like JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corporation (NYSE:BAC), and The Home Depot, Inc. (NYSE:HD), PACCAR Inc (NASDAQ:PCAR) is one of the stocks that elite investors are keeping their eye on as inflation rises.
“Shares of truck manufacturer PACCAR Inc (NASDAQ:PCAR) fell as the North American Class 8 market continued its cyclical decline, and the outlook for sales and production took another step back with the economic impact from the pandemic.”
9. The Allstate Corporation (NYSE:ALL)
Number of Hedge Fund Holders: 27
The Allstate Corporation (NYSE:ALL) provides insurance products. It is one of the top insurance stocks among hedge funds. At the end of the third quarter of 2021, 27 hedge funds in the database of Insider Monkey held stakes worth $821 million in The Allstate Corporation (NYSE:ALL), compared to 33 funds in the preceding quarter, holding stakes in the company worth $923 million.
The Allstate Corporation (NYSE:ALL) has grown dividend payouts consecutively for the last eleven years, outperforming peers in a tough market. The Allstate Corporation (NYSE:ALL) also looks set to benefit from a rise in interest rates as it has one of the most impressive investment portfolios worth nearly $100 billion. The stock offers an attractive yield of almost 3% and high single-digit annual earnings growth potential too.
In its Q2 2020 investor letter, Generation PMCA, an asset management firm, highlighted a few stocks and The Allstate Corporation (NYSE:ALL) was one of them. Here is what the fund said:
“The Allstate Corporation (NYSE:ALL), the second largest personal auto and home insurance writer in the U.S., should see earnings expand this year, during a challenging period when most companies aren’t expected to deliver year-over-year earnings growth. Higher mortality rates from coronavirus are being offset by lower mortality outside of virus-related deaths and expense control. In auto, the benefits of lower miles driven due to the pandemic offset auto rebates. Historically, Allstate’s scale and conservative underwriting have translated to superior profitability metrics. The company is on pace to achieve a mid-teen return on equity for ’21, well above peers. However, with shares currently at 1.3x book value, The Allstate Corporation (NYSE:ALL) trades at a discount to competitors. We believe skepticism around recent acquisitions to diversify away from life and auto insurance (e.g., identify theft and warranties) is the reason for its discounted valuation. We expect The Allstate Corporation (NYSE:ALL) to continue to cast its net further afield given the long-term threat of autonomous vehicles to its automobile franchise. We are comfortable with the strategy, especially since these acquisitions are immaterial. Meanwhile, the company should continue to post peer-beating results. Our FMV estimate is $120.”
8. Ingersoll Rand Inc. (NYSE:IR)
Number of Hedge Fund Holders: 33
Ingersoll Rand Inc. (NYSE:IR) markets specialty vehicles and medical technologies. On January 20, Baird analyst Michael Halloran maintained an Outperform rating on Ingersoll Rand Inc. (NYSE:IR) stock with a price target of $64, underlining that the firm was undergoing a “significant” transformation and had an “underappreciated” profile. The analyst added that Ingersoll Rand Inc. (NYSE:IR) had significant margin levers looking ahead into 2022.
Ingersoll Rand Inc. (NYSE:IR) remains one of the favorite stocks among elite hedge funds as the Fed prepares to raise interest rates. Among the hedge funds being tracked by Insider Monkey, Connecticut-based investment firm Viking Global is a leading shareholder in Ingersoll Rand Inc. (NYSE:IR), with 3.6 million shares worth more than $183 million.
“We also added to Ingersoll Rand Inc. (NYSE:IR). Ingersoll Rand is a global market leader with a broad range of mission-critical flow creation technologies (pumps, compressors, etc.) for industrial and medical applications. Over the past several years, a new management team has repositioned Ingersoll Rand Inc. (NYSE:IR) toward less cyclical, more profitable businesses, which are supported by a stronger culture of employee engagement and continuous improvement. More recently, the company’s top-line growth has accelerated as the pandemic fades, and margins are benefiting from cost synergies achieved in its merger integration with Gardner Denver (with further runway ahead). This has boosted cash flows and enabled management to resume its successful bolt-on acquisition strategy, acquiring Seepex GmbH, a global leader in positive displacement pumps for end markets such as water, wastewater, food and beverage and chemicals, in Q2. With an increasingly visible organic and acquisition-driven growth capability, characteristics the market appears to be undervaluing, we added to our position at an attractive discount to our PMV estimate.”
7. SVB Financial Group (NASDAQ:SIVB)
Number of Hedge Fund Holders: 45
SVB Financial Group (NASDAQ:SIVB) operates as a diversified financial services firm. On January 10, investment bank Morgan Stanley assumed coverage of SVB Financial Group (NASDAQ:SIVB) stock with an Overweight rating and a price target of $985. Analyst Manan Gosalia said that the company was expected to beat market estimates on earnings by 25% in the fourth quarter of 2021, citing higher fee income versus consensus expectations as one of the reasons behind the bullish view.
SVB Financial Group (NASDAQ:SIVB) was also recently named among a group of banks expected to benefit from a rising rates environment by Morgan Stanley. The bank continues to witness top hedge fund investment. Among the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in SVB Financial Group (NASDAQ:SIVB), with 641,591 shares worth more than $415 million.
“Among our top contributors was SVB Financial Group (NASDAQ:SIVB). SVB Financial Group is a leading provider of banking services to the innovation economy across the US and in key international markets. Headquartered in Silicon Valley, SVB Financial Group (NASDAQ:SIVB) offers financial products to clients in the technology, life science/health care and private equity/venture capital. Total client funds increased 51% to $243 billion in 2020—one of the company’s strongest years—as investors seek differentiated returns in innovative private companies. SVB’s high level of client service and long experience in the industry give it not only a historical data and knowledge advantage, but also a reputational edge. We believe this enables the company to quickly bring products to market and make speedy underwriting decisions. Given SVB’s strong profit growth comes at a time when net interest margins are depressed, we believe shares are priced attractively and added to our position.”
6. Costco Wholesale Corporation (NASDAQ:COST)
Number of Hedge Fund Holders: 55
Costco Wholesale Corporation (NASDAQ:COST) owns and runs membership warehouses. The company is one of the top hedge fund picks in the retail sector. At the end of the third quarter of 2021, 55 hedge funds in the database of Insider Monkey held stakes worth $4.39 billion in Costco Wholesale Corporation (NASDAQ:COST), up from 54 in the preceding quarter worth $4.32 billion.
Even though the retail sector underperformed the wider market in late 2021 and early 2022 due to the rise in virus cases and weaker-than-expected holiday sales numbers, Costco Wholesale Corporation (NASDAQ:COST) continued to climb in this tough period, reporting sales of $15.6 billion in January, up 15.5% year-on-year. As interest rates climb, Costco Wholesale Corporation (NASDAQ:COST) is expected to further benefit as spending on consumer staples and household appliances surges as a result of a boom in housing and employment.
Along with JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corporation (NYSE:BAC), and The Home Depot, Inc. (NYSE:HD), Costco Wholesale Corporation (NASDAQ:COST) is one of the stocks that hedge funds are buying as interest rates climb.
“We saw these dynamics at play in the Fund. Some of the worst-performing stocks this quarter were among our best performers in Q1 2020. Another example was the market’s reaction to Costco Wholesale Corporation (NASDAQ:COST) (1.5% weight in the Fund) during the quarter. From December 31, 2020 to March 8th, Costco Wholesale Corporation (NASDAQ:COST) shares declined 17% and dropped below their pre-pandemic high. The common rationale offered by sell-side analysts was that Costco would face difficult one-year “comps” (i.e. same-store sales, which compare sales from stores open for at least a year). Because so many consumers rushed to Costco ahead of shelter-in-place and subsequent quarantines, it will be harder for Costco to meaningfully beat those results when compared year-over-year. That may indeed be true, but we struggle to understand how Costco could be “less valuable” than it was a year earlier when it concurrently increased its membership base by over 7%, or 3.9 million members. With membership renewal rates around 90%, the vast majority of the new customers Costco brought in last year will be around for years to come.
Analysts also complained about Costco Wholesale Corporation (NASDAQ:COST) raising its already industry-leading minimum wage to $16/hour, with an average “effective” pay of $23-$24/hour when you include overtime and bonuses. Costco paying its employees “too much” has been a common gripe of Wall Street analysts for at least two decades. While the extra pay does indeed impact short-term profit margins, it also serves to make Costco more durable, as its flywheel (i.e. a virtuous value cycle) starts with happy employees. A 20-year chart of Costco stock price is evidence that this strategy works and we’re confident that it will continue to work.”
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Disclosure. None. 10 Stocks to Buy Amid Rising Interest Rates is originally published on Insider Monkey.