7 Value Stocks Primed to Take Off in a Rising Rate Environment

value stocks - 7 Value Stocks Primed to Take Off in a Rising Rate Environment

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As of yet, interest rates aren’t officially on the rise. The Federal Reserve has yet to hand down its first hike to the overnight lending rate since the onset of the pandemic. However, rising bond yields are now pricing in a 70% chance of a 50 basis point hike in March, rapidly suggesting the Fed needs to act, and act fast. For all stocks, including value stocks, this is a difficult market to be in.

Indeed, stocks are already pricing the impact of these future hikes. The market has been on a downtrend of late, as inflation concerns and rising rates continue to get factored into equities.

Inflation is generally a negative for most stocks, as it increases the price of inputs such as materials and labor. This puts downward pressure on margins, and makes hitting profitability benchmarks difficult.

Rising interest rates, as a result of surging inflation, generally provide for valuation compression in the market. Valuation multiples come down as investors are forced to discount future cash flows at a higher rate.

So, the question is, how should investors look for value stocks in this environment? After all, each company will be impacted by these macro factors, to some degree.

Here are seven top defensive value stocks I think have excellent upside, despite these headwinds.

  1. Chevron (NYSE:CVX)
  2. Merck (NYSE:MRK)
  3. Safe Bulkers (NYSE:SB)
  4. HP (NYSE:HPQ)
  5. Mr. Cooper (NASDAQ:COOP)
  6. The Andersons (NASDAQ:ANDE)
  7. Navient (NASDAQ:NAVI)

Top Value Stocks to Buy: Chevron (CVX)

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Due to the rising cost of natural gas and crude oil, Chevron stock has absolutely taken off. Higher energy prices means stronger margins and higher revenue and earnings across the board. Chevron’s recent earnings have indicated just that. The company has outperformed investor expectations on the top and bottom line, generating a return on invested capital of more than 60%. Expectations are for this performance to continue, with Chevron’s top line potentially growing nearly 20% in 2022.

For a company of this size, that’s remarkable.

These strong earnings are expected to result in continued dividend increases. Chevron recently raised its dividend for the 35th consecutive year. This move hiked its annualized yield to 4.16%.

Despite this strong performance, Chevron stock still trades at an incredible multiple of only 14 times earnings. Accordingly, it’s no surprise to see world-class value investors like Warren Buffett jump aboard the CVX train here.

Merck (MRK)

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Most big-pharma names posted impressive returns last year. However, Merck lagged. This stayed relatively flat in 2021. MRK stock has faced serious competition, and has fallen behind other Pharma stocks offering vaccines, which garner more headline attention as of late (though, recently, those stocks have seriously underperformed).

Merck is more of a “traditional” big pharma company, with a vast drug pipeline spanning a number of specialties. Of note, a big EU approval of the company’s cancer medication Keytruda has been a catalyst for investors to pay attention to. That said, this stock has remained relatively stable over time.

For value investors, stability can be a good thing. And by some accounts, Merck isn’t necessarily cheap. This company currently trades around 10.5 times earnings, a fair multiple to be sure.

That said, Merck is also a company that pays out a dividend yield of 3.6% and has one of the most stable growth prospects in the industry. A global champion, Merck’s pipeline remains strong, and this company offers a sustainable growth model that’s hard to find in today’s market. Accordingly, value investors looking for income and growth may want to take a look at MRK stock right now.

Top Value Stocks to Buy: Safe Bulkers (SB)

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Those worried about inflation and rising rates certainly have a number of options to hedge their portfolios. One sector that’s benefited from this environment has been cargo shipping. Among the players in this space that has garnered attention of late is Safe Bulkers.

Safe Bulkers is a mid-cap cargo shipping company, trading at a valuation of around $500 million. With forward earnings per share growth of 186%, investors have flocked to such trades as portfolio protection against inflation. Of late, this stock has performed well, surging on recent inflation concerns.

Now, Safe Bulkers’ appeal may wear off should the market consider this company’s rise priced in. That said, demand for vessels remains high right now, and new supply could be years away. Accordingly, these macro fundamentals speak to a potential boom period of a few years for this sector.

From a purely fundamentals perspective, this stock looks dirt-cheap. Investors can pick up Safe Bulkers for around 4-times earnings. That’s right folks — four times the company’s annual earnings. And that’s not even on a forward basis.

Safe Bulkers appears to be one of the cheapest companies out there, in a sector that could boom in the years to come. Value investors everywhere should put this stock on their watch list, at the very least, right now.

HP (HPQ)

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A legacy computing company, HP is certainly an interesting stock to look at from a value perspective. Like many of its high-tech peers, HP stock has soared in recent years, booming alongside the pandemic. However, unlike many of its peers, HPQ stock remains on an intriguing trajectory, continuing higher in recent weeks.

Much of this I think has to do with the company’s valuation. Currently trading at around nine times earnings, HP is among the cheapest stocks among its peers. Furthermore, this company offers a relatively attractive dividend yield of 2.68% at the time of writing. This sort of value and income are rarely found in this sector, making this an interesting stock to look at right here.

As the global personal computing company continues to chug along, I think value investors will continue to be interested at these levels. Sure, HP’s best days may be behind the company. However, as far as value goes in this sector, it’s hard to bet against this company’s current valuation.

Top Value Stocks to Buy: Mr. Cooper (COOP)

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One stock I’ve been watching closer of late is Mr. Cooper. This financial services provider offers a range of mortgage financing products for those seeking single-family homes. Given the relatively healthy nature of the U.S. mortgage market for the time being, this stock is one that’s performed quite well of late. In fact, COOP stock recently hit an all-time high, and is trading just a hair under this high at the time of writing.

Now, rising interest rates could certainly cool the market for mortgages in the U.S. Refinancings could slow, as could new home originations.

However, the real estate market continues to show strength, with inventories low and demand from millennials surging. As demographics continue to change, the mortgage market is one that many investors may start to consider as a steady long-term growth space.

This is perhaps one of the most speculative names on this list. However, Mr. Cooper’s valuation at around nine times forward earnings is dirt-cheap. Accordingly, those bullish on the outlook for this market for at least the next three years may want to take a hard look at this stock.

The Andersons (ANDE)

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The agricultural sector is one many investors ignore. Indeed, most economists do as well — ever heard of “non-farm payrolls?”

However, The Andersons is a leading agricultural firm, focused on providing plant nutrients, ethanol, and other farm-related products to its customer base. This consumer staples and food distributor has the potential to be a great inflation hedge. As food prices soar, input costs will rise as well. This could be a big catalyst, boosting the value of ANDE stock.

Over the past year, ANDE stock has been a strong performer. Trading near its 52-week high, investors may be surprised to learn that this stock only trades at around 16 times its earnings. For a stock with such a defensive business model, this is a valuation many investors can get behind.

I think the company’s trade segments and agriculture-related businesses are ones that are overlooked. Accordingly, for investors looking for deep value, this is a stock worth considering right now.

Top Value Stocks to Buy: Navient (NAVI)

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Finally, we have another lending company, Navient. Navient is a financial company focused on the refinancing of student loans.

Now, student loans are a rather unattractive sector to be in right now. Much of the rhetoric from the Democratic Party recently has been around cancelling student loans. For companies like Navient trying to convince folks to convert their government loans to private loans, this has made it much harder of a sell.

Accordingly, it’s perhaps unsurprising to see this stock trade at around six times earnings. Investors are looking elsewhere for opportunities within the financials sector. That said, when the market turns its back on a sector or a company, that’s particularly the time when value investors come swooping in.

Right now, President Joe Biden’s Build Back Better Plan appears to be in real trouble. Accordingly, in addition to what I view as a relatively strong long-term outlook, there are short-term catalysts with this stock worth considering. Accordingly, Navient is a value stock I’ve got on my watch list right now. I’d recommend investors at least watch this stock from here, it’s a cheap one.

On the date of publication, Chris MacDonald 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.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.


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