Just when investors thought that rising prices slipped into the rearview mirror, market participants now find themselves scrambling for smart stocks to buy when interest rates rise. Of course, the spiked demand centers on a key consumer report which indicated that inflation remains stubbornly high. As well, the pace of rising prices pinged higher than economists anticipated.
Logically, then, investors should prepare for the Federal Reserve to take strong action. Last year, the central bank committed to doing whatever was necessary to combat inflation. With prices remaining elevated, it may be time for the Fed to take off the kid gloves. More than likely, this dynamic implies more rate hikes, in turn raising borrowing costs. As a result, the equities market responded poorly. However, certain enterprises may mitigate the storm better than others. These are the smart stocks to buy when interest rates rise.
|AWK||American Water Works||$139.78|
As an insurance provider, Allstate (NYSE:ALL) effectively benefits from a captive audience. For instance, in most states, it’s illegal to drive without a bare minimum of insurance coverage. But here’s the thing – even if you could drive without insurance, why would you? America’s roadways aren’t exactly incident free. Further, traffic collisions – and serious ones at that – increased significantly following the coronavirus pandemic.
Further, investors don’t need to just rely on interesting narratives to have confidence in ALL. For instance, the underlying enterprise features several positive financial metrics. Right now, the market prices ALL at a trailing one-year sales multiple of 0.69. As a discount to revenue, Allstate ranks better than 63.75% of its peers. In addition, it enjoys a 14.2% three-year revenue growth rate, outpacing nearly 74% of the industry.
While Allstate might be one of the boring stocks to buy when interest rates rise, it gets the job done. Covering analysts peg ALL as a consensus moderate buy. Further, their average price target stands at $142.75, implying 8.5% upside potential.
Duke Energy (DUK)
A utility stalwart, Duke Energy (NYSE:DUK) also features a captive audience. For customers in Duke’s coverage map, you either pay or you don’t get critical resources. As well, the company cynically benefits from a natural monopoly. Due to extremely high barriers to entry, not many enterprises can compete in the utility realm. Therefore, DUK deserves consideration among stocks to buy when interest rates rise.
Financially, Duke offers a reasonable profile relative to the utility sector, which isn’t known for fiscal brilliance. According to Gurufocus.com’s proprietary calculations for fair market value (FMV), DUK pings as modestly undervalued. Objectively, its profitability metrics may attract investors the most. For instance, its operating margin stands at 22.33%, outpacing 76.82% of the field. As well, its net margin of 9.28% ranks better than average. Turning to Wall Street, analysts peg DUK as a consensus moderate buy. Further, their average price target stands at $108.44, implying nearly 12% upside potential. Plus, Duke carries a forward yield of 4.15%.
American Water Works (AWK)
Another compelling utility play, American Water Works (NYSE:AWK) provides water and wastewater services in the U.S. Like Duke, American Water enjoys a natural monopoly. It’s not that legal frameworks prevent competition. Rather, the barrier to entry makes such a proposition unfeasible for most enterprises. Certainly, it’s a cynical topic. Still, the dynamic makes AWK one of the stocks to buy when interest rates rise.
Now, prospective investors will need to exercise a bit more patience with AWK. Fundamentally, it’s a long-term investment. Per Gurufocus.com’s proprietary FMV calculations, AWK rates as fairly valued. Objectively, though, the stock’s forward multiple of 29.46 indicates that it’s significantly overvalued compared to the industry.
On the plus side, American Water features a net margin of 21.62%. This stat outpaces 87.39% of the industry. Finally, Wall Street analysts peg AWK as a consensus hold. However, their average price target stands at $162.20, implying almost 15% upside potential. Also, AWK carries a forward yield of 1.85%.
Affiliated Managers Group (AMG)
Billed as a strategic partner to independent investment management firms, Affiliated Managers Group (NYSE:AMG) essentially represents an asset manager for high-net-worth clients. Presently, the company has about $650 billion collectively under management. On a fundamental level, market downcycles bring out the best in terms of investment guidance. In other words, only the fittest survive in a bear market. Therefore, AMG may be one of the smart stocks to buy when interest rates rise because people need guidance during difficulties. Multiply that sentiment eight-fold during unusual cycles such as this.
For those seeking an objective discount in the equities space right now, AMG may be an ideal candidate. For instance, the market prices shares at a trailing multiple of 6.03. As well, AMG trades at a forward multiple of 8.32. As a discount to earnings, both stats rank better than 73% of the competition. Lastly, Wall Street analysts love Affiliated Managers, pegging AMG as a consensus strong buy. As well, their average price target stands at $193.40, implying nearly 22% upside potential.
Based in Plano, Texas, Rent-A-Center (NASDAQ:RCII) is a public furniture and electronics rent-to-own company. As a candidate for smart stocks to buy when interest rates rise, I personally have doubts about RCII. Primarily, a weakened consumer base might not support a rent-to-own business. However, such a business model could be ideal when discretionary funds dwindle.
Objectively, Zacks Equity Research reports that Rent-a-Center beat its most recent quarterly earnings estimate of 75 cents a share with an earnings-per-share performance of 86 cents. However, the company missed its revenue target by 0.64%, adding to the vagaries. However, if you’re seeking a bargain, RCII might be up your alley. Gurufocus.com states that it’s significantly undervalued. Objectively, the market prices RCII at a forward multiple of 6.28. As a discount to earnings, the company ranks better than 93% of the competition. Finally, covering analysts peg RCII as a consensus moderate buy. Further, their average price target stands at $33.33, implying over 24% upside potential.
Tied to the agribusiness and food industry, Bunge (NYSE:BG) really encompasses the best stocks to buy when interest rates rise. No matter how advanced society becomes, humans will still need nourishment. Obviously, this dynamic applies everywhere. Further, with geopolitical crises pressuring global food supplies and related resources, BG should rise if only cynically.
According to Gurufocus.com, Bunge features a fairly valued investment profile. Objectively, however, the market prices BG at a trailing multiple of 9.32. As a discount to earnings, Bunge ranks better than 75.52% of its peers. Further, BG trades at a forward multiple of 8.3. For this metric, Bunge ranks better than nearly 86% of the field. Operationally, Bunge’s three-year revenue growth rate stands at 14.8%, above the sector average. Also, it has a return on equity of 18.45%, indicating an extremely high-quality business. Lastly, covering analysts peg BG as a consensus strong buy. Also, their average price target stands at $123, implying over 25% upside potential.
Based in Austin, Texas, EZCorp (NASDAQ:EZPW) is a pawn shop operator, one of the few that’s publicly traded. To be sure, EZCorp presents risks. However, it could also be one of the smart stocks to buy when interest rates rise. Invariably, pawn shops provide a mechanism for making ends meet.
According to TheStreet’s Greg Emerson back in April 2010, “[o]ne thing the financial crisis has taught us is that banks fail, and even the ones that are bailed out are plenty capable of losing people’s money. When this happens, pawn shops often step in to fill the need for short-term loans and cash for nearly anything with resale value. To confirm EZCorp’s relevance, during the trailing year, EZPW gained over 47% of equity value. And since the January opener, shares moved up almost 7%.
Turning to the Street, only one analyst covers EZPW, Canaccord Genuity’s Brian McNamara. However, the expert is significantly bullish, forecasting a $15 price target. This implies upside potential of nearly 69%.
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.