As an investor, you should never rely on any one data point to make a decision in the market. However, with so much bad news over the trailing year, Wall Street is not taking its own advice. Due to a better-than-expected employment read, major investment indices jumped to record highs. However, the benchmark 10-year Treasury yield remained largely unchanged, a curious circumstance.
Let’s back up for a bit. A major reason why we’ve seen volatility in many stocks — particularly tech firms which depend on a high-growth narrative — is that the Street began worrying about rising inflation. As the AP explained, inflation “means future payments from bonds won’t buy as many bananas, minutes’ worth of college tuition or whatever else is rising in price.”
In response, bond prices decline during periods of rising inflation expectations, which then increases their yields as price and yield share an inverse relationship. If the economy were truly recovering, then you would expect the Treasury yield to stem its (as some would argue) disconcerting rise, perhaps even decline on the positive news. But that’s not what is happening, which may impact how you approach certain stocks to buy.
You might think that a rising Treasury yield based on inflation expectations is good for growth investments because more dollars are chasing fewer units, taking a page out of the precious metals’ bullish thesis. However, metals don’t have businesses and revenue streams. Thus, they don’t generate earnings nor do they hire people. In fact, inflation hurts consumers because let’s face it — their paycheck won’t automatically rise to compensate for it.
Ultimately, this translates to fewer sales (as in growth) for growth companies. And that starts to trickle down into investors’ fears, who anticipate that the joy ride is over and dump out. But some businesses may be able to mitigate the uncertainty. Here are stocks to buy no matter what happens to the benchmark Treasury yield.
- Duke Energy (NYSE:DUK)
- Procter & Gamble (NYSE:PG)
- Public Storage (NYSE:PSA)
- Kroger (NYSE:KR)
- Crown Castle International (NYSE:CCI)
- Honda Motor (NYSE:HMC)
- Welltower (NYSE:WELL)
A word of caution before we get into it. If things get hairy in the market, it may not matter what sector you’ve put your money in. Also, the Treasury yield isn’t the only metric to focus on. For instance, stock trading on margin is at a record high, raising the specter of mass-scale margin calls. So, understand the risks before considering these stocks to buy.
Stocks to Buy: Duke Energy (DUK)
For years, the push for clean energy has hit a fever pitch. And it’s not just at the infrastructural level. On the consumer end, the rise of electric vehicles confirmed the appetite for alternative power sources. Plus, with the current Biden administration and Democratic control of Congress, prospects for green energy appear very bright.
I’m not arguing against this broad thesis. However, when people turn on the lights, they don’t care from where those electrons came. They just want the darn lights to come on. When they don’t, bad things happen, which explains the slow and steady rise of Duke Energy. No, DUK stock isn’t going to make you rich. But it might spare you the drama of the rising Treasury yield.
As I mentioned above, inflation is a killer for consumers because their purchasing power erodes. Therefore, you expect discretionary purchases to decline first. Energy? You can’t live without it. Utilities represent the last sector to take a hit, which means DUK stock is worthy of consideration.
Procter & Gamble (PG)
While the Treasury yield has moved noticeably higher over the past few weeks, one could make the counterargument that this is merely a movement from an extremely low point to a level that’s more aligned with reality. Therefore, you don’t want to necessarily panic about the present circumstances.
Still, it’s useful to think that if the Treasury yield is rising, there may be a reason for it. Hear me out as I’m not saying this is a firm fact. However, it’s possible that the smart money don’t believe the “purty” words coming out of the Biden White House. Because here’s the other reality — the coronavirus pandemic blew a trillions-dollar gap in our fiscal deficit.
That money to restore America has to come from somewhere, which is why you should look into Procter & Gamble. Like Duke Energy, PG stock is not going to make you rich. What it benefits from is secular demand.
You see, you do have to use the facilities even if we incur a prolonged recession. And there are many other things that we must address. Procter & Gamble has the household goods we need, bolstering the case for PG stock.
Public Storage (PSA)
Months before the coronavirus pandemic, the Wall Street Journal reported that investors were putting their money into storage unit operators, such as Public Storage. Interestingly, the WSJ cited two main factors for bullishness in this sector: fears of a recession and low interest rates.
So far, concerned investors got the former right. But the latter is an interesting conundrum. Yes, PSA stock ultimately weathered the Covid-19 storm well. And the subterranean Treasury yield didn’t hurt its storyline. But should yields continue to rise, wouldn’t that hurt publicly traded storage unit operators?
Maybe not. I say this because there’s another reason why investors have piled into this real estate niche — demographics. Specifically, baby boomers are looking to downsize now that their nest is emptying out. With fewer people in each boomer household and with lower active-income prospects, this demographic has every incentive to seek cheaper accommodations.
Of course, after a lifetime of work, boomers have accumulated a bunch of stuff. That has to go somewhere, which makes PSA stock an intriguing idea no matter what happens to the Treasury yield.
On the same principle that consumers must spend money on certain product categories — no matter what the Treasury yield does to purchasing power — I like the idea of investing some funds toward Kroger. True, KR stock has been disappointing, if I’m being perfectly honest.
In prior InvestorPlace publications, I suggested that Kroger and the grocery industry at large could benefit from the panicked rush to buy essential goods, such as toilet paper. Further, the food supply chain disruption appeared to bolster this cynical argument for KR stock. However, the end result of this cynicism is a trailing-year performance of 20% — not bad but certainly not great.
Still, as a boring idea, this may actually suit Kroger just fine. Without the speculative hype that has driven up many questionable trades, there’s nothing to unwind. Fundamentally as well, Kroger enjoyed robust free cash flow in 2020, sparking a more favorable debt-to-cash ratio. This should give management freedom to expand if it so desires.
Crown Castle International (CCI)
It’s important to note that not every one of the stocks to buy that may be agnostic to the Treasury yield has to involve a doom-and-gloom narrative. Case in point is Crown Castle International. According to its website, the company is the nation’s largest provider of communications infrastructure, such as cell towers, small cells and fiber. With the 5G rollout, CCI stock is a name to consider no matter what happens.
After taking care of the core essentials — food, water and something to wipe down afterward — consumers will direct their spending on what they need to produce goods and services of value. We’ve already covered energy. Now, we’re going to consider telecommunications. As the global economy becomes further interconnected, not having access to wireless platforms is frankly a non-starter.
Therefore, I don’t care what happens with the Treasury — up, down or in flipping circles. We need connectivity solutions if we have any hope of getting out of this mess. Therefore, CCI stock is one to watch closely.
Honda Motor (HMC)
With the consumer transportation market intensely eyeballing EVs, you might think that mentioning Honda Motor for any theme of stocks to buy is a ridiculous concept. And I just might agree with you if EVs were accessible to the everyday household. But as things stand in 2021, the cheapest “normal” EV by a major automaker is the Mini Cooper SE, which starts at just under $30,000 before subsidies.
I don’t think that’s going to cut it because a base trim Honda Civic will start around $21,000. Yeah, it’s a combustion-engine platform but have you looked at the gas mileage? We’re talking 31 city/40 highway, or a combined estimate of 34.
Folks, just do the math. To account for the EV premium against an equivalent-featured car, you’re talking years of driving to break even. And forget the myth that EVs are maintenance free because they’re not. Therefore, HMC stock is a winner on the reasonable end of the consumer spectrum.
Also, take note that Honda is leaving Formula 1 at the end of the 2021 season. That’s sad for auto racing fans but it could be music to the ears of HMC stock shareholders because F1 doesn’t really make financial sense.
As an income-generating equity unit, a rising Treasury yield wouldn’t on paper be the most supportive of Welltower. However, the underlying business of WELL stock — a real estate investment trust that primarily focuses on senior housing and assisted living communities — is likely more than viable to overcome the yield madness.
Really, the Welltower narrative comes down to that powerful catalyst I mentioned earlier — demographics. As the largest generation in U.S. history based on live births, it’s no surprise that millions of them are retiring en masse. This is a trend that will continue for many years, which bodes well for WELL stock.
That’s not to say that Welltower offers guaranteed upside. Certainly, senior housing solutions are not cheap and a worsening economy could take a bite out of this growth story.
Nevertheless, if you’re worried exclusively about rising yields, WELL is the place to look to as it’s likely yield-agnostic given the broader circumstances.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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.