The Fed raised interest rates earlier this week, and with it comes an opportunity for savvy investors to look into the financial sector for winning stock plays.
To start, you might be wondering what has changed between Dec 2016 and now to understand the scope of rise in number of rate hikes this year.
The two major mandates for rising rates — full employment level and inflation of 2% — have been fulfilled (well, almost). The current unemployment rate of 4.7% is close to full employment level. Also, inflation data (moving toward the Fed’s target) supports a further increase in rates.
The finance sector, as a whole (except REITs) typically benefits from the rising rates. The steeper yield curve helps the financial stocks to increase revenues. Also, rising rates reflect an improving domestic economy. As the financial sector is mainly dependent of the nation’s economy, this further supports profitability.
With Donald Trump as the U.S. President, the expectations of strong domestic economic growth, based on what he has promised (lower tax rates and boost in infrastructure spending) is also likely to benefit the financial stocks. Further, Trump’s pro-rate-hike and lesser regulation stance will provide growth impetus to the financial stocks.
These factors have largely led to the market rally, benefiting finance stocks the most. Since the election results, the Zacks categorized Finance sector gained nearly 16.8%, outpacing the 10.4% growth for the S&P 500.
In case the Fed indicates an increase in number of rate hikes this year, the rally for the financial stocks should continue for quite some time. So, if you want to be part of this rally, this is the right time to buy a few finance stocks that have strong fundamentals and good growth prospects in the rising rate environment.
Choosing the Winning Financial Stocks
While all the finance sector stocks (except REITs) will benefit from rising rates, to select a handful of these for your investment portfolio is quite daunting. To make this difficult task somewhat easy, we have taken the help of the Zacks Stock Screener.
Through it we shortlisted finance stocks with Value Score and Growth Score of ‘A’ or ‘B’ along with market capitalization of greater than $500 million. Also, these stocks carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Here are the five financial stocks that met the above-mentioned criteria:
Old Republic International Corporation (NYSE:ORI), with a market cap of $5.3 billion, provides insurance underwriting and related services business primarily in the U.S. and Canada. The company has a Zacks Rank #2, Value Score of ‘A’ and Growth Score of ‘B.’
With a market cap of $3.4 billion, Evercore Partners Inc. (NYSE:EVR) operates as an independent investment banking advisory firm globally. While sporting a Zacks Rank #1, the stock has Value Score of ‘B’ and Growth Score of ‘A.’
Lazard Ltd (NYSE:LAZ), with a market cap of $5.9 billion, is a financial advisory and asset management firm, operating across the globe. The company has a Zacks Rank #2, Value Score of ‘B’ and Growth Score of ‘A.’
Fidelity & Guaranty Life (NYSE:FGL), with a market cap of $1.6 billion, provides annuities and life insurance products in the U.S. While carrying a Zacks Rank #2, the stock has Value Score of ‘A’ and Growth Score of ‘B.’
With a market cap of $885.8 million, Greenhill & Co., Inc. (NYSE:GHL) operates as an independent investment bank for corporations, partnerships, institutions, and governments worldwide. The company has a Zacks Rank #2, Value Score of ‘B’ and Growth Score of ‘A.’
Will You Make a Fortune on the Shift to Electric Cars?
Here’s another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
It’s not the one you think.
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