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6 Stocks to Make the Most of a Rising Yield Environment

Swarup Gupta
Strategists at JPMorgan think that rising bond yields indicate that the U.S. economy is booming.

On Sep 21, yields on U.S. government securities took a pause after making steady advances throughout the week. The Federal Reserve has placed rates on an upward trajectory and is widely slated to announce another hike later this week. Strategists at JPMorgan (JPM) think that this is an encouraging sign for stocks.

Currently, the U.S. economy is in robust shape, as is evident from multiple gauges. The financial major’s strategists think that this will push investors to rotate out of defensive holdings into cyclical sectors.  

This is why they think that the financials, automotive semiconductor and capital goods sectors are good investments at this point. Adding these stocks to your portfolio would enable you to benefit from the strength of the U.S. economy.

Yields Surge Strongly in Recent Weeks

On Sep 14, 10-year U.S. Treasury Note yield hit 3% for the first time since Aug 2. The spike in the yield came immediately after the Commerce Department revised U.S. retail sales data for July from the initial increase of 0.5% to 0.7%. Moreover, the hourly wage rate surged strongly in August. (Read: Yield on US 10-Year Treasury Note Hits 3%: 5 Top Bank Picks)

Thereafter, the 10-year Treasury note yield jumped 3.3 basis points to 3.081% on Sep 19, the highest since May 17 and close to its seven-year high of 3.109%. The 10-year note yield had crossed the coveted 3% mark on Sep 18, the first time since late May. (Read: 5 Top Bank Stocks to Buy on Surging Bond Yields)

Strong Economy Boosts Yields

Strategists at JPMorgan think that a robust U.S. economy is boosting bond yields. The strength in the economy is more than evident from the bullish nature of several economic indicators.

Readings of gauges for manufacturing, wage growth, inflation and consumer confidence have all been encouraging recently. This is likely to make investors rotate out of defensive holdings into more cyclical stocks.

Cyclical Sectors are Good Bets

JPMorgan’s strategists think that financial, automotive, capital goods and semiconductor stocks are good bets in such a situation. Up to now, automotive and capital goods’ stocks have been largely unaffected by trade-related concerns. Investors have chosen to focus on the economy and robust earnings numbers.  

Financials are likely to gain as the yield spread widens, in turn boosting their margins. The slump in chip stocks is also likely to be temporary, unless the economy undergoes a significant downturn. Some analysts are already projecting an increase in spending on wafer equipment next year.

Our Choices

Strategists at JPMorgan are confident that the recent spurt in yields is an encouraging signal for stocks. As investors gather confidence in the economy, they are likely to switch from defensive sectors to cyclical options.

Investing in capital goods, auto, financial and chip stocks would make for a profitable option. However, picking winning stocks may be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

Atkore International Group Inc. ATKR manufactures and distributes electrical raceway products.

Atkore International has a Zacks Rank #1 (Strong Buy) and VGM Score of A. The company has expected earnings growth of 91.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 11% over the last 60 days.

Twin Disc, Incorporated TWIN designs, manufactures and sells heavy duty off-highway power transmission equipment.

Twin Disc sports a Zacks Rank #1 and has a VGM Score of A. The company has expected earnings growth of 27.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 17.3% over the last 60 days.

RenaissanceRe Holdings Ltd. RNR primarily provides property-catastrophe reinsurance to insurers and reinsurers globally on the basis of excess of loss (coverage of losses over a specified limit).

RenaissanceRe has a Zacks Rank #1 and VGM Score of A. The company has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved by 4.7% over the last 60 days.

PACCAR Inc. PCAR is a leading manufacturer of heavy-duty trucks in the world and has substantial manufacturing exposure to light/medium trucks.

PACCAR has a VGM Score of B. The company has expected earnings growth of 41.6% for the current year. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ON Semiconductor Corporation ON is an original equipment manufacturer (OEM) of a broad range of discrete and embedded semiconductor components.

ON Semiconductor carries a Zacks Rank #2 (Buy) and has a VGM Score of A. The company has expected earnings growth of 26.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 3.3% over the last 60 days.

Broadcom Inc. AVGO is a premier designer, developer and global supplier of a broad range of semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor (CMOS) based devices and analog III-V based products.

Broadcom has a Zacks Rank #2 and VGM Score of B. The company has expected earnings growth of 28.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 3.3% over the last 30 days.

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Atkore International Group Inc. (ATKR) : Free Stock Analysis Report
 
PACCAR Inc. (PCAR) : Free Stock Analysis Report
 
Broadcom Limited (AVGO) : Free Stock Analysis Report
 
RenaissanceRe Holdings Ltd. (RNR) : Free Stock Analysis Report
 
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ON Semiconductor Corporation (ON) : Free Stock Analysis Report
 
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