Volatility in interest rates has been a key driver many investors have had their eye on recently. Indeed, with rates surging to as high as 1.75% earlier this year, before falling down to 1.32% this week, investors really don’t know what to believe.
On the one hand, expectations are that inflation could be running rampant. If inflation proves to be structural and persistent, rising costs could inhibit profits. This type of environment generally isn’t good for growth stocks.
On the other hand, if inflation proves to be transitory, as the Federal Reserve would like us to believe, then perhaps these rates are closer to what could be expected to be maintained over the medium-term.
For those concerned that inflation expectations could pick up along with interest rate hikes sooner than later, finding stocks that react positively to a higher interest rate environment is important. In this article, we’re going to discuss three such stocks that fit this mandate well.
Among the biggest U.S. banks, and global banks for that matter, Goldman Sachs (GS) is a top choice for long-term investors in any market. However, with the potential for interest rates to rise from these relatively low levels, Goldman Sachs is a company that should be on every investor’s radar right now. (See Goldman Sachs stock charts on TipRanks)
Generally speaking, for investors worried about rising rates, financial firms are a great place to be. A steepening yield curve boosts net interest margins (NIMs) for large lenders. This drives additional bottom-line profitability for these behemoths which are already spitting out cash.
Additionally, a rising interest rate environment signals economic strength. Given the economic sensitivity of global banks such as Goldman Sachs, this company is well-positioned to capitalize on higher interest rates to a degree that other companies simply can’t.
Given Goldman Sachs’ recent dividend hike announcement, it’s clear the company is doing well in this environment. Any sort of positive driver from here could take this stock on a very nice ride.
According to TipRanks' stock analysis, GS receives a Smart Score of 9, meaning the stock is likely to Outperform. The Smart Score is derived from 8 unique data sets, including Analyst recommendations, Crowd Wisdom, Hedge Fund Activity, Media Sentiment and multiple Technical stock factors.
A long-term investor favorite, Berkshire Hathaway (BRK.B) is a great long-term holding for so many reasons. This conglomerate owns everything from railroads to energy, banks, and insurance companies.
Berkshire’s heavy investments in banking and insurance provide investors with an “offense as a defense” strategy. In good times (such as times of rising interest rates), these businesses both do very well. Accordingly, as Warren Buffett likes to say, Berkshire is a bet on the strength of America. (See Berkshire Hathaway stock charts on TipRanks)
In particular, insurance happens to be one of Berkshire’s biggest components. The Oracle of Omaha has been investing in insurance businesses for decades, and swears by the long-term durability of these business models.
Indeed, receiving premiums from millions of consumers, and investing the float (difference of premiums less insurance payouts) over time can produce amazing results. However, most of these investments are in fixed-income assets such as bonds. Interest rates are a function of bond yields. When interest rates are low, so are bond yields. These lower yields hurt the returns of insurers who need to match long-term liabilities to long-term assets.
However, in a rising interest rate environment, insurers do very well. Accordingly, these companies are widely seen as great inflation hedges, due to their large fixed income exposure.
For investors seeking exposure to one of the best U.S. insurance companies (along with a number of other great businesses), Berkshire Hathaway is about as safe a long-term bet as there is.
According to TipRanks' stock analysis, BRK.B receives a Smart Score of 7, meaning the stock is Neutral. The Smart Score is derived from 8 unique data sets, including Analyst recommendations, Crowd Wisdom, Hedge Fund Activity, Media Sentiment and multiple Technical stock factors.
Consumer discretionary stocks are another group that tend to do well when interest rates rise. Yes, Apple (AAPL) can also be broadly defined as a growth stock. Accordingly, there’s some debate as to whether rising interest rates are broadly bullish, or negative, for such companies. (See Apple stock charts on TipRanks)
However, rising interest rate environments signal inflation and increasing consumer spending. For companies selling discretionary consumer products, this is a good thing.
Yes, margins do tend to compress in inflationary environments, given the rising cost of materials and labor. However, given the strength of Apple’s brand, there’s no doubt this is one of the few companies that can maintain its impressive margins over time. Consumers have shown they’re relatively elastic to price increases over time for high-quality goods such as iPhones, Macbooks, etc.
One of the largest shareholders of Apple also happens to be Warren Buffett’s Berkshire Hathaway. Thus, investors have yet another reason to own BRK.B. However, as we’ve seen with Apple’s recent price action, this is a great stock to bet on by itself. It seems more exposure is better than less when it comes to world-class gems like Apple.
According to TipRanks' stock analysis, Aapl receives a "Perfect 10" Smart Score, meaning the stock is likely to Outperform. The Smart Score is derived from 8 unique data sets, including Analyst recommendations, Crowd Wisdom, Hedge Fund Activity, Media Sentiment and multiple Technical stock factors.
Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.