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6-Year High Inflation Reinforces June Rate Hike: 5 Top Picks

Sreya Bhowmick
Brinker International (EAT) delivered earnings and revenue surprises of -0.83% and 0.14%, respectively, for the quarter ended June 2018. Do the numbers hold clues to what lies ahead for the stock?

The U.S. Federal Reserve will likely lift the benchmark interest rate this week, to stay a step ahead of inflation.

Yesterday’s Labor Department report revealed that U.S. consumer prices in May had logged its biggest gain in the last six years.

The U.S. economy is at its full employment level and a stretched workforce market will eventually push up inflation; as employers are trying to brave labor shortages with higher wages. A super-low jobless rate coupled with expectations for a stronger economy will likely tip the Fed’s hand to bring in four hikes this year instead of three.

Against this backdrop, investors can bet on select banking, brokerage and insurance stocks to fetch alluring returns.

Higher Inflation Stokes Rate Hike Prospects

The Fed is likely to increase rates by 25 basis points (bps) in the 1.75-2% range, at the end of tomorrow’s two-day Federal Open Market Committee (FOMC) policy meet. According to the CME Fed Watch Tool, the odds of a rate hike this time are as high as 96.3%.

The minutes from FOMC’s last month’s meeting also reveal that intertest rate on surplus reserves will climb by 20 bps to push the federal funds rate.

May’s Consumer Price Index climbed 2.8% year over year, marking its highest gain since February 2012. Core index improved 2.2% from the year-ago period, recording its biggest advance since February 2017. Consumer Inflation in April was pegged at 2.5%, well above the Fed’s 2% target.

Beyond 2018, FOMC’s Personal Consumption Expenditures deflator forecasts are anticipated to remain near or slightly higher than 2%, steady with the 10-year U.S. breakeven inflation rates.

Notably, overnight indexed swaps currently indicate a nearly 75 bps of rate hikes in the next 12 months to about 2.37%.

Upbeat consumer sentiment is giving rise to inflation expectations. The University of Michigan consumer-sentiment index, currently pegged at 98.8 in May, is still at its long-time highs. On the other hand, inflation expectations for 2019 have moved up to 2.8% form 2.7%.

Factors Pouring in American Inflation

The jobs’ report for May mirrored a tightening labor market scenario in Trump land, with unemployment sinking to 3.8%, its lowest level since the dot-com roar of the early 2000. Also, a 2.7% year-over-year upswing in last month’s average hourly earnings wiped out fears of wage stagnation.

However, the Fed will try to cool down such speedy job growth trajectory via added rate hikes, as increased employment and wage rates will continue to push up inflation higher than its favored gauge of 2%.   

Additionally, higher oil prices, the December enacted tax overhaul, weakening U.S. currency and synchronous global growth, as well as brewing trade war tensions between America and its economic allies, might all escalate price pressures going forward.

Likely Gainers from a Rate Hike

Brokerage firms and asset managers will benefit from higher interest rates since a rise in rates generally coincides with periods of economic strength and investor enthusiasm.

In addition, a rising-rate environment will be beneficial for bank stocks as banks widen the spread between what they earn by funding longer-term assets, such as loans, with shorter-term liabilities.

Moreover, rise in rates will enable insurance firms to invest in higher-yielding government securities, thereby leading to greater returns.

5 Hot Picks

Given such positives, we have highlighted five promising stocks that are poised to gain from the impending rate hike.

These picks have a Zacks Rank #1 (Strong Buy) or #2 (Buy) and a VGM Score of A or B.

Kemper Corporation KMPR offers life and health, and property and casualty insurances to  
 to businesses and individuals. The company’s headquarters are located in Chicago, IL.

The Zacks Consensus Estimate for earnings has moved up 16.7% to $4.34 per share for 2018, in the last 60 days. Notably, the projected year-over-year earnings growth rate for the company is currently pegged at 164.6% and 5.5% for 2018 and 2019, respectively. Kemper Corporation’s shares have gained 7.3% in the past month. The stock sports a Zacks Rank #1 and has a VGM Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.

AllianceBernstein Holding L.P. AB provides investment management and research services in the market. The company’s headquarters are in New York.

The stock carries a Zacks Rank #2 and has a VGM Score of A. The Zacks Consensus Estimate for earnings has moved up 1.2% to $2.54 per share for 2018, in the last 60 days. Notably, the projected year-over-year earnings growth rate for the company is currently pegged at 10.4% and 3.4% for 2018 and 2019, respectively. AllianceBernstein’s shares have gained 8.5% in the past month.

Old Second Bancorp, Inc. OSBC offers different types of banking services in the market. The company’s headquarters are located in Aurora, IL.

The stock carries a Zacks Rank #2 and has a VGM Score of B. TheZacks Consensus Estimate for earnings has moved up 5.7% to $1.11 per share for 2018, in the last 60 days. Notably, the projected year-over-year earnings growth rate for the company is currently pegged at 37% and 11.3% for 2018 and 2019, respectively. Old Second Bancorp’s shares have gained 3.8% in the past month.

Nicolet Bankshares Inc. NCBS provides retail and commercial banking services for individuals and businesses. The company’s headquarters are located in Green Bay, WI.

The stock carries a Zacks Rank #2 and has a VGM Score of A. The Zacks Consensus Estimate for earnings has moved up 8.3% to $3.67 per share for 2018, in the last 60 days. Notably, the projected year-over-year earnings growth rate for the company is currently pegged at 7.3% and 6.3% for 2018 and 2019, respectively. Nicolet Bankshares’ shares have gained 1.5% in the past month.

Aflac Incorporated AFL provides life and supplemental health products in the market. The company’s headquarters are located in Columbus, GA.

The stock carries a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for earnings has moved up 2.1% to $3.97 per share for 2018, in the last 60 days. Notably, the projected year-over-year earnings growth rate for the company is currently pegged at 16.4% and 3.8% for 2018 and 2019, respectively. Aflac Incorporated’s shares have gained 1.1% in the past month.

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