Jittery sentiment dominates Wall Street these days. So far in the year, broader indices, including the Dow Jones Industrial Average, S&P 500, and the Nasdaq 100, have lost around 7.3%, 6.6%, and 4.1%, respectively. Meanwhile, many investors are readjusting their portfolios to account for an increasingly hawkish U.S. Federal Reserve (Fed). Even in this environment, there can be some prime stocks to buy.
There are clear signs that the central bank is getting ready to tighten the monetary policy in its fight against inflation. Most analysts expect to see at least three interest rate hikes in 2022.
Against this backdrop, tech and growth stocks may keep tumbling through 2022, as higher borrowing costs are expected to erode their future earnings. On the other hand, the rotation to banks, insurance companies, and real estate investment trusts (REITs) should accelerate, as they typically benefit from higher interest rates.
On a more positive note, a hawkish Fed does not necessarily imply a bear market. Data from Trust Advisory Services reveal that the S&P 500 has risen at an average annualized rate of 9% during the 12 rate-hike cycles since the 1950s. The index has seen positive returns in 11 of those instances.
In other words, some long-term investors could consider buying an exchange-traded fund (ETF) like the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). Others might consider diversifying their portfolios.
With that said, here are seven stocks to buy that are primed to benefit from rising interest rates:
- Ares Capital (NASDAQ:ARCC)
- Bank of America (NYSE:BAC)
- Invesco Preferred ETF (NYSEARCA:PGX)
- JPMorgan Chase (NYSE:JPM)
- Medical Properties Trust (NYSE:MPW)
- SPDR S&P Insurance ETF (NYSEARCA:KIE)
- VanEck Inflation Allocation ETF (NYSEARCA:RAAX)
Stocks to Buy: Ares Capital (ARCC)
- 52-week range: $17.15 – $22.35
- Dividend yield: 7.81%
Ares Capital is a business development company (BDC) that essentially operates as a private equity firm. Management looks for targeted opportunities that generate current income and capital appreciation via debt and equity investments.
Ares Capital released third quarter (Q3) 2021 results in late October. Generally accepted accounting principles (GAAP) net income stood at $334 million, or 73 cents per diluted share, down from $441 million in the prior-year quarter. This BDC boasts over $6 billion of available liquidity.
On these metrics, Chief Executive Officer (CEO) Kipp deVeer commented, “During the third quarter, we hit on all cylinders with robust new investing activity, strengthening credit quality and nearly $150 million in net realized gains.”
Ares Capital focuses on rescue financing of mid-sized companies. The company particularly benefits from its “unitranche” structured investments, where it becomes the only lender. A rising interest-rate environment implies that Ares can command higher returns for the loans it offers to its customers.
At the current stock price, ARCC stock offers an almost 8% dividend yield. The stock price hovers around $20, up 22% over the past year. Shares are trading at 11.5 times forward earnings and 4.9 times trailing sales. The 12-month median price forecast for Ares Capital stock is $22.50. Interested investors could regard $20 as a good entry point.
Bank of America (BAC)
- 52-week range: $29.57 – $50.08
- Dividend yield: 1.87%
With more than $2.5 trillion in assets, Bank of America is the second-largest bank by assets stateside. Management announced Q4 and full-year 2021 metrics on Dec. 19. Revenue rose 10% year-over-year (YOY) to $22.1 billion.
Net income went up to $7 billion, or 82 cents per diluted share, up from $5.5 billion, or 59 cents per diluted share, a year ago.
Following the results, CEO Brian Moynihan remarked, “Our fourth-quarter results were driven by strong organic growth, record levels of digital engagement, and an improving economy. We grew loans by $51 billion and added $100 billion of deposits during the quarter, further strengthening our position as the leader in retail deposits.”
The bank has a very asset-sensitive business. After its earnings report, the bank revealed that a 1% increase in short- and long-term interest rates could lead to $7.2 billion of extra net interest income over the next year. Loan growth is expected to continue in 2022.
BAC stock currently hovers around $43, up 35% over the past 12 months. From a valuation standpoint, it is a relatively low-risk stock with 14 times forward earnings and 1.46 times book value. The 12-month median price forecast for BAC stock stands at $52.25.
Stocks to Buy: Invesco Preferred ETF (PGX)
- 52 Week Range: $14.46 – $15.37
- Dividend Yield: 4.87%
- Expense Ratio: 0.52%
My next choice is an exchange traded fund (ETF), namely the Invesco Preferred ETF. It invests in preferred securities issued in the U.S. Preferred shares embody characteristics of bonds, which pay a fixed income, as well as stocks, which represent ownership in a company.
Holders are entitled to dividend payments on a set schedule, similar to bond interest payments. A company’s earnings do not have much impact on the price. Yet, interest rates and credit ratings play key roles.
The fund was first listed in 2008. PGX, which has 283 holdings, follows the returns of the ICE BofAML Core Plus Fixed Rate Preferred Securities Index.
The fund is heavily weighted toward financial companies (67.43%), followed by utilities (10.02%), real estate (8.51%), and communication services (6.82%). Preferred shares in the fund include those from Citigroup (NYSE:C), JP Morgan Chase, Wells Fargo (NYSE:WFC), AT&T (NYSE:T), and Bank of America.
Over the past 12 months, PGX is down about 2%, hovering around $14.50. Investors who would like to park their cash during these volatile times might want to research the fund further.
JPMorgan Chase (JPM)
- 52 week range: $127.35 – $172.96
- Dividend yield: 2.76%
My next choice is another leading financial institution, JPMorgan Chase. Management put out Q4 and full-year 2021 financials on Jan. 14. Revenue came in at $30.3 billion, up 1% YOY. But net income declined to $10.4 billion, or $3.33 per diluted share, down from $11.6 billion, or $3.74 per diluted share in the prior-year quarter.
After the announcement, CEO Jamie Dimon cited, “In 2021, we extended credit and raised over $3 trillion in capital for our consumer and institutional clients around the world.”
Thanks to the anticipated increase in interest rates, management is forecasting a recovery in interest income. However, headwinds include a potential drop in fixed income related net interest income, lower investment banking activity, and higher capital requirements. Meanwhile, the bank is investing heavily in the digital future to take on the disruption brought on by fintech, especially blockchain technologies.
JPM currently hovers slightly around $140, up 8% over the past 12 months. Shares are trading at 1.68 times book value and 13 times forward earnings. The 12-month median price forecast for JPMorgan stock is $176.
Stocks to Buy: Medical Properties Trust (MPW)
- 52-week range: $19.39 – $24.13
- Dividend yield: 4.89%
Birmingham, Alabama-based Medical Properties Trust is a healthcare facility REIT. It specializes in hospitals, rehabilitation centers, and behavioral facilities. The REIT is one of the leading non-government owner of hospitals stateside.
MPW released Q3 2021 numbers in late October. Net income came in at $171 million, or 29 cents per diluted share, up from $131 million, or 25 cents per diluted share in the prior-year quarter. Cash and equivalents ended the period at $350 million.
The group has a stable business that generates high margins and collects predictable recurring revenue. It has been growing primarily through acquisitions, recently announcing a $760 million sale-and-leaseback transaction that added 18 facilities to its portfolio.
MPW stock trades at slightly around $22.50, up 6.6% over the last 12 months. At the current price, the REIT supports a generous 4.89% dividend yield. Shares trade at 8.6 times trailing sales. The 12-month median price forecast for Medical Properties Trust stock is $25.
SPDR S&P Insurance ETF (KIE)
- 52-week range: $32 – $41.80
- Dividend yield: 1.84%
- Expense ratio: 0.35% per year
My next choice is another fund: the SPDR S&P Insurance ETF, which invests in insurance shares. These financial names typically reinvest customer premiums in interest-bearing accounts. So, higher interest rates translate into improving profitability.
KIE started trading in November 2005. It has 56 holdings and follows the equal-weighted KBW Insurance Index.
The fund’s leading 10 stocks account for 22% of net assets. Such a diversified approach and the relatively low-risk nature of insurance stocks could make this ETF appealing for defensive investors.
As sub-segments, we see Property & Casualty Insurance (45.50%), Life & Health Insurance (25.68%), Insurance Brokers (12.61%), Reinsurance (9.68%), and Multi-Line Insurance (6.53%).
The fund is up about 15% over the past year and hit an all-time high on Jan. 13. As it seems it is doing so well, this company has won its spot for my top stocks to buy.
Stocks to Buy: VanEck Inflation Allocation ETF (RAAX)
- 52-week Range: $22.46 – $28.02
- Dividend Yield: 5.41%
- Expense Ratio: 0.78% per year
My final choice is the VanEck Inflation Allocation ETF. It consists of other funds that offer exposure to inflation-fighting real assets, such as commodities, REITs, natural resources shares, infrastructure stocks, and master limited partnerships (MLPs). The ETF started trading in April 2018.
Among the leading funds on the roster are Invesco Optimum Yield Diversified Commodity Strategy ETF (NASDAQ:PDBC), VanEck Merk Gold Shares (NYSEARCA:OUNZ), Vanguard Real Estate ETF (NYSEARCA:VNQ), VanEck Energy Income ETF (NYSEARCA:EINC), and Global X US Infrastructure Development ETF (BATS:PAVE).
The ETF gained 3.72% over the past 12 months and now generates a 5.41% dividend yield. It also hit an all-time high in mid-November, but has declined around 10% since then. Interested investors may use the recent dip as an opportunity to invest in RAAX.
On the date of publication, Tezcan Gecgil 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.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.