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7 Stocks to Buy to Beat Next Year’s Interest Rate Blues

With the Federal Reserve committed to tackling historically high inflation through hawkish monetary policies, it’s time for investors to consider the best stocks to buy for rising interest rates. Sure, some indicators suggest that the central bank might loosen its stance. However, in the bigger picture, folks must deal with reality. Following an unprecedented expansion of the money supply, the Fed must control act aggressively.

Don’t take my word for it. Instead, just listen to St. Louis Fed President James Bullard, who insists on a higher target policy rate. “We’ve got a ways to go to get restrictive,” he said in an interview with MarketWatch. That’s not great news for growth-oriented names. But it could spell good tidings (at least relatively speaking) for stocks to buy for rising interest rates.

AFL

Aflac

$72.09

PGR

Progressive

$132.17

SRE

Sempra Energy

$165.06

PSX

Phillips 66

$109.09

AB

AllianceBernstein

$40.30

DFS

Discover Financial

$107.66

ARCC

Ares Capital

$19.60

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Aflac (AFL)

A businessman ripping his shirt off to reveal an upward green arrow with the word buy on it underneath
A businessman ripping his shirt off to reveal an upward green arrow with the word buy on it underneath

Source: ImageFlow/Shutterstock.com

An insurance specialist, Aflac (NYSE:AFL) represents the largest provider of supplemental insurance in the U.S. While the company underwrites a range of policy requests, it’s perhaps best known for its payroll deduction insurance coverage. This service pays cash benefits when a policyholder has a covered accident or illness, per the company’s public profile.

Fundamentally, AFL makes a strong case for stocks to buy for rising interest rates because of fears of unknown variables. Prior to the coronavirus pandemic, the concept of a worldwide outbreak leading to mass pandemonium was either exclusive to history books or Hollywood dramas. Given that it became a harsh reality, people now take supplemental insurance coverage much more seriously.

To be fair, Gurufocus.com labels AFL as significantly overvalued. On a year-to-date basis, AFL jumped nearly 22%. Also, in the trailing month, it’s up almost 9%. Nevertheless, AFL still trades at 9-times trailing-12-month (TTM) earnings, which sits below the sector median of 12 times. Combined with its fundamental relevance, AFL ranks as one of the stocks to buy for rising interest rates.

Progressive (PGR)

Man holding stacks of money. Millionaire.
Man holding stacks of money. Millionaire.

Source: Epic Cure / Shutterstock

Well known for its quirky commercials featuring the fictional salesperson character Flo, Progressive (NYSE:PGR) represents the third largest insurance carrier and the number one commercial auto insurer in the U.S. Fundamentally, insurance stocks and benchmark rates generally feature a direct correlation: as one rises, so too does the other.

Now, certain circumstances such as market volatility and other critical headwinds may disrupt this relationship. Nevertheless, as one of the stocks to buy for rising interest rates, PGR makes an excellent case for itself because of the underlying business. Simply put, according to Progressive’s website, nearly every state requires car insurance coverage. The lone state that doesn’t – Massachusetts – still requires proof of financial responsibility.

In other words, Progressive cynically enjoys a captive audience. Further, with the post-pandemic new normal imposing ramped up dangers on the road, insurance becomes even more critical. Therefore, PGR easily ranks among the stocks to buy for rising interest rates.

Sempra Energy (SRE)

hands at desk near laptop computer, with one hand holding a pile of hundred dollar bills
hands at desk near laptop computer, with one hand holding a pile of hundred dollar bills

Source: shutterstock.com/CC7

Most folks I talk to love the Golden State, particularly Southern California. With excellent weather year-round and plenty of stuff to do, it’s a dream experience for many. However, great experiences come at a cost. While many residents complain about the metaphorical sunshine tax, it’s actually a real thing. Enter Sempra Energy (NYSE:SRE).

Representing one of the largest utility holding companies in the U.S., Sempra commands a massive footprint of about 40 million customers. Further, these households tend to generate higher-than-average income compared to the rest of the nation. As well, because California represents a highly desired destination state – conservative talking points be damned – Sempra knows it owns a hostage audience.

Because of this permanent demand structure, SRE cynically ranks among the stocks to buy for rising interest rates. While I get that people are moving out of California in droves, there are also plenty of higher-income folks moving in. Thus, SRE will continue to enjoy tremendous relevance.

Phillips 66 (PSX)

Stocks to buy: smartphone with the words "buy" and "sell" displayed on the screen. The user's finger is about to press buy. Stock charts are in the background of the image.
Stocks to buy: smartphone with the words "buy" and "sell" displayed on the screen. The user's finger is about to press buy. Stock charts are in the background of the image.

Source: Chompoo Suriyo / Shutterstock.com

With Phillips 66 (NYSE:PSX), investors will want to exercise caution through careful entry into the market. A multinational energy firm, Phillips 66 mainly specializes in the downstream component of the industry. This deals with segments such as refining and marketing. However, rising borrowing costs tend to be negative for commodities, including energy resources. Therefore, you may want to tiptoe into PSX shares.

Indeed, the circumstances become more complicated because of the underlying market performance. Since the start of the year, PSX gained nearly 44% of equity value. Also, in the trialing month, it’s up 4.5%. In other words, interested investors may want to wait a bit until shares cool down before pulling the trigger.

Nevertheless, the broader fundamentals should bode well for PSX, making it one of the stocks to buy for rising interest rates. With possibly 90% of companies requiring a return to the office (at least partially), this circumstance will boost mobility statistics. Of course, mobility on the freeways isn’t free, thus benefitting PSX.

AllianceBernstein (AB)

a green button on a keyboard has an arrow pointing upward with the word "Buy". representing safe stocks to buy
a green button on a keyboard has an arrow pointing upward with the word "Buy". representing safe stocks to buy

Source: AdityaB. Photography/ShutterStock.com

In prior InvestorPlace articles, I’ve mentioned the bullish case for AllianceBernstein (NYSE:AB), typically because outgoing Speaker of the House Nancy Pelosi rates AB shares highly. However, as a candidate among stocks to buy for rising interest rates, I’m sure many folks remain skeptical. After all, AllianceBernstein represents a global asset management firm. Its job becomes much more difficult during a deflationary cycle.

And believe me, should the Fed continue to shrink the money supply via raising borrowing costs, this action is deflationary: fewer dollars chasing after more goods. Under this scenario, several publicly traded securities may stumble because of business erosion.

Still, AB could be a surprise idea among stocks to buy for rising interest rates because of societal realities. AllianceBernstein caters to high-net-worth individuals, meaning that the enterprise uses only the best resources. It also only hires the best advisors. Combine the two and you have one of the few asset managers that can guide their clients successfully through this deflationary storm. Just imagine the powerful word of mouth that such a success story can generate.

Discover Financial (DFS)

Stocks to buy: A close-up shot of a hand pressing a "BUY NOW!" button on a laptop keyboard.
Stocks to buy: A close-up shot of a hand pressing a "BUY NOW!" button on a laptop keyboard.

Source: Shutterstock

Although Discover Financial (NYSE:DFS) tends to be overlooked relative to its more popular competitors within the financial services space, DFS is well worth consideration among stocks to buy for rising interest rates. On an elemental and cynical level, Discover pads its bottom line when interest rates rise. Further, as economic pressures build, people tend to resort to credit to make ends meet.

Again, it’s a cynical argument and I’m not celebrating this dynamic. Rather, I’m pointing out the harsh truth. For instance, after the level of consumer loans dropped to a multi-year low of $739 billion in April 2021, this metric skyrocketed to $928 billion this month. Interestingly, consumer loans hit over $859 billion just before the coronavirus pandemic capsized American society.

Personally, it appears that rising consumer debt amid significant economic ambiguities represents a danger point. Still, for the near and intermediate term, it’s quite possible that DFS qualifies as one of the stocks to buy for rising interest rates. Bluntly speaking, DFS will benefit until it doesn’t.

Ares Capital (ARCC)

BUY spelled out on a computer keyboard representing stocks to buy
BUY spelled out on a computer keyboard representing stocks to buy

Source: Shutterstock

On a final note, if you want to take a pot shot regarding stocks to buy for rising interest rates, you could check out Ares Capital (NASDAQ:ARCC). Billed as a leading business development company (BDC) with a focus on comprehensive financing solutions for middle-market enterprises, Ares might seem a risky venture under the current environment. After all, companies tend to fail during deflationary cycles.

Nevertheless, Wall Street remains relatively warm to ARCC stock. No, it’s not in positive territory. However, with an 8% loss for the year – compared to more than 17% down for the S&P 500 – Ares currently holds its own. As well, ARCC appears to have arrested its decline, fading just barely under parity in the trailing half-year period.

Fundamentally, Ares rescue-financing business – which targets enterprises featuring a market capitalization of between $20 and $200 million – could be enticing. Because these companies don’t have the same access to capital markets as an established blue chip, Ares can forge a robust niche.

It’s risky but sometimes, you need to take some wagers to enjoy big gains in this type of market.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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