Rate hike sensitive stocks have had a tough time recently, but once those hikes end, stand back and watch these names fly.
An event that the markets eagerly look forward to is the Federal Open Market Committee meeting. The stance of monetary policies has a significant impact on the broader markets and several sectors.
Anticipating the potential direction of monetary policies can therefore help investors make money on rake hike sensitive stocks.
The federal reserve has pursued contractionary monetary policy in the last few quarters to curb inflation. However, it finally seems that the policy stance will change.
The leading economic index for the U.S. has declined to its lowest level since November 2020.
The possibility of expansionary monetary policies will increase as the recession probability increases. I expect the Fed to pursue expansionary policies in the second half of 2023.
Expansionary policies make liquidity in the financial system swell. This translates into higher speculative activity across risky asset classes. Further, contractionary policies results in a stronger dollar and expansionary policies imply a weaker dollar.
Therefore, there exists an interesting relation between interest rate and stock market. Let’s discuss three rate hike sensitive stocks that are positioned to surge higher on reversal of policy stance.
Newmont Corporation (NEM)
Gold has been trading around $2,000 an ounce. In the event of rate hike pause or rate cuts, I expect the precious metal to surge to new highs.
The best way to get exposure to gold without buying bricks is through quality gold mining stocks. Newmont Corporation (NYSE:NEM) looks attractive at a forward price-earnings ratio of 21.1. The stock also offers an attractive dividend yield of 3.36%.
From the perspective of free cash flow growth, Newmont expects FCF of $2.4 billion if gold is at $2,000 an ounce. For every $100 increase in gold price, the company expects annual FCF to increase by $400 million.
The company is therefore positioned for healthy FCF upside. This will translate into dividend growth and higher share repurchase.
Newmont has an investment grade balance sheet and a strong liquidity buffer of $6.7 billion. I expect the company to pursue aggressive organic and acquisition driven growth.
Currently, the company has guided for 6 million ounces of annual gold production through 2032. This provides clear cash flow visibility for shareholder value creation.
Rio Tinto (RIO)
Rio Tinto (NYSE:RIO) stock has trended lower by 10% for year-to-date 2023. This does not come as a surprise, with a recession likely to affect the demand for industrial commodities.
However, there are two points to note. First, RIO stock trades at a forward P/E of 8 and the stock seems significantly undervalued.
In an event of rate hike pause or rate cut, I expect industrial commodities to surge. A deeper recession would also imply fiscal expansionary policy in the form of stimulus.
This will add to the positive sentiment. Considering the valuation, I expect a strong rally in the second half of 2023.
Rio Tinto is also attractive from a fundamental perspective. Last year, the company reported $9 billion in free cash flow. The company plans to invest $27 billion between 2023 and 2025.
These investments will translate into revenue growth and cash flow upside. I must add that RIO stock provides an attractive dividend yield of 7.6% and dividends are sustainable.
Cryptocurrencies is another asset class that is likely to gain if they paused the rate hike. Bitcoin (BTC-USD) has been trending higher and it’s likely that the uptrend will sustain.
I am therefore bullish on Coinbase (NASDAQ:COIN) stock for a major rally in the coming quarters.
A weak dollar and excess liquidity in the financial system will be positive for cryptocurrencies. As trading and speculative activity increases, the world’s second largest crypto exchange is positioned to benefit.
Of course, Coinbase had a setback in 2022, with the company reporting EBITDA level losses. However, with Bitcoin in an uptrend, I expect improved Q1 results.
It’s also encouraging to note that despite the headwinds in 2022, Coinbase reported growth in the subscription and services revenue segment. As institutional clients swell and assets under custody increases, I expect this segment performance to remain strong.
Coinbase ended 2022 with cash and equivalents of $5.5 billion. This provides ample buffer for global expansion and continued platform development.
On the date of publication, Faisal Humayun did not hold (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.