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Over the last year interest rates have risen considerably. The 10-year U.S. Treasury note has more than doubled from 1.7% a year ago to 3.9% on Wednesday March 8.
Interest rates are arguably the most important factor in discerning economic activity, and thus the stock market. Understanding how they move markets and why can give investors a huge edge.
The Fed is worried that inflation will continue to run too hot, and they must continue to raise rates to fight this trend.
Image Source: TradingView
On Tuesday, in front of the Senate, Federal Reserve Chair Jerome Powell made two very significant statements: “the ultimate level of rates is likely to be higher than previously anticipated," and “if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
These are so significant because earlier this year investors began to believe that peak interest rates were near, and that we might even see them decrease by the end of 2023.
Since this statement, the odds of a 50-basis point raise during the March FOMC went from a 30% chance to 74%. Because of the shift, investors must adjust their expectations from Fed pivot, to higher for longer.
Image Source: CME Group
Higher interest rates mean that economic growth will slow, but it also means that fixed income products have a higher yield making them more appealing to investors. Today, the one-year Treasury Bill is yielding a hefty 5.2%.
Because of this, some market participants are going to rotate out of the most expensive and risky stocks for the safety of bonds. But certain stocks can still perform well during this period. There is always a bull market somewhere. Here are three stocks investors can buy to fight against rising rates.
Fair Isaac
Fair Isaac (FICO - Free Report) is a data analytics company focused on credit scoring services. Anyone who has checked their credit score is familiar with FICO. Fair Isaac also provides services to enterprise clients who utilize FICO technology to improve business decisions regarding customer intelligence, credit risk, operational cost, fraud and compliance among others.
FICO is likely to benefit from a rising interest rate environment because with the cost of debt increasing dramatically, individuals and businesses will need to understand their credit worthiness more than ever. As the rate of interest increases, borrowers will need to become more discerning about their loans, as the cost to service them increases.
FICO is an extremely robust business, with stock performance to prove it. Over the last 15 years FICO is up 3200%, which comes out to 26% annualized. Its revenues have doubled in the last 10 years and it boasts gross margins of 78% and net margins of 28%. FICO stock is up 16% YTD.
Image Source: Zacks Investment Research
FICO currently has a Zacks Rank #2 (Buy), indicating a positive earnings revision trend. Current quarter sales are expected to grow 6% YoY to $377 million, and current year sales are projected to grow 7.4% to $1.5 billion. The current quarter earnings are expected to climb 11% YoY to $5.20 per share, while the current year earnings are expected to just 15% YoY to $19.86 per share.
Because FICO is such a high-quality business, it earns a premium valuation. It is trading at 43x one-year forward earnings, although that is still below its five-year median of 50x.
Image Source: Zacks Investment Research
Illinois Tool Works
Over the last month and 12 months, the industrial sector ETF (XLI - Free Report) has been a relative leader. Industrials have remained strong during the rapid rise of interest rates over the last year.
Image Source: Zacks Investment Research
Illinois Tool Works (ITW - Free Report) is also a 110-year-old company, with a long history of earnings, and dividend growth. ITW is a manufacturer and seller of industrial tools through seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. Illinois Tool Works has over 18,000 patents pending and produces products that are critical to the businesses they serve.
ITW has achieved such longevity because of its 'small-wins strategy' based on decentralization, simplicity, customer-focused innovation, and acquisitions, which should help it thrive during more challenging economic times.
Illinois Tool Works stock has very steadily appreciated and returned an average of 13% annually for the last 30 years, outperforming the S&P 500, which averaged 11%. Making it an even more stable stock is ITW’s dividend payment. ITW yields 2.2% and has increased by an average of 9% annually over the last five years.
Image Source: Zacks Investment Research
ITW has a Zacks Rank #2 (Buy), indicating upward trending earnings revisions. Earnings expectations have been revised higher across all timeframes.
Image Source: Zacks Investment Research
ITW is another stock with a premium valuation, reflecting its very high-quality business practices. It currently trades at 25x one-year forward earnings, which is above its five-year median of 23x, but well off its 2020 high of 36x.
Image Source: Zacks Investment Research
META
Meta Platforms (META - Free Report) , formerly Facebook, is one of the best performing stocks in the market this year. META is the world's largest social media platform. The company's portfolio evolved from a single Facebook app to multiple apps like photo and video sharing app Instagram and WhatsApp messaging app thanks to savvy acquisitions.
Across its product line META has 3 billion daily active users, and even Facebook, which is so commonly written off as a dying platform, still has nearly 2 billion DAUs.
META’s stock performance is something of an enigma. It is up 53% YTD, but performance is practically flat over the last five years. Over that same period sales have grown from $40 billion to $117 billion annually, while gross margins have remained near 80%. This bizarre setup is an opportunity for discerning investors.
Image Source: Zacks Investment Research
Whether interest rates are high or low, people and businesses are going to use Meta’s platforms to communicate and share. Even after its near 100% runup from the 2022 lows Meta stock is still trading at the lower end of its historical valuation. Trading at 18x one-year forward earnings, META is below its five-year median of 22x, and well below the industry average of 46x.
Image Source: Zacks Investment Research
Meta Platforms currently earns a Zacks Rank #2 (Buy), indicating upward trending earnings revisions.
Image Source: Zacks Investment Research
Bottom Line
A rising interest rate environment is something markets haven’t experienced in a long time. This shock is what caused stocks to tumble in 2022. Many investors have grown used to low rates, which for the last two decades has consistently pushed investors further out on the risk curve.
With higher interest rates, the hurdle rate for investors is also higher, so focusing on companies that have clearly proven their business models over a long period, and ideally offer a dividend are going to be a conservative and safe way to invest in this stock market regime. With those huge margins maybe even Meta will add a dividend down the road.
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3 Stocks to Buy as Interest Rates Rise
Over the last year interest rates have risen considerably. The 10-year U.S. Treasury note has more than doubled from 1.7% a year ago to 3.9% on Wednesday March 8.
Interest rates are arguably the most important factor in discerning economic activity, and thus the stock market. Understanding how they move markets and why can give investors a huge edge.
The Fed is worried that inflation will continue to run too hot, and they must continue to raise rates to fight this trend.
Image Source: TradingView
On Tuesday, in front of the Senate, Federal Reserve Chair Jerome Powell made two very significant statements: “the ultimate level of rates is likely to be higher than previously anticipated," and “if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
These are so significant because earlier this year investors began to believe that peak interest rates were near, and that we might even see them decrease by the end of 2023.
Since this statement, the odds of a 50-basis point raise during the March FOMC went from a 30% chance to 74%. Because of the shift, investors must adjust their expectations from Fed pivot, to higher for longer.
Image Source: CME Group
Higher interest rates mean that economic growth will slow, but it also means that fixed income products have a higher yield making them more appealing to investors. Today, the one-year Treasury Bill is yielding a hefty 5.2%.
Because of this, some market participants are going to rotate out of the most expensive and risky stocks for the safety of bonds. But certain stocks can still perform well during this period. There is always a bull market somewhere. Here are three stocks investors can buy to fight against rising rates.
Fair Isaac
Fair Isaac (FICO - Free Report) is a data analytics company focused on credit scoring services. Anyone who has checked their credit score is familiar with FICO. Fair Isaac also provides services to enterprise clients who utilize FICO technology to improve business decisions regarding customer intelligence, credit risk, operational cost, fraud and compliance among others.
FICO is likely to benefit from a rising interest rate environment because with the cost of debt increasing dramatically, individuals and businesses will need to understand their credit worthiness more than ever. As the rate of interest increases, borrowers will need to become more discerning about their loans, as the cost to service them increases.
FICO is an extremely robust business, with stock performance to prove it. Over the last 15 years FICO is up 3200%, which comes out to 26% annualized. Its revenues have doubled in the last 10 years and it boasts gross margins of 78% and net margins of 28%. FICO stock is up 16% YTD.
Image Source: Zacks Investment Research
FICO currently has a Zacks Rank #2 (Buy), indicating a positive earnings revision trend. Current quarter sales are expected to grow 6% YoY to $377 million, and current year sales are projected to grow 7.4% to $1.5 billion. The current quarter earnings are expected to climb 11% YoY to $5.20 per share, while the current year earnings are expected to just 15% YoY to $19.86 per share.
Because FICO is such a high-quality business, it earns a premium valuation. It is trading at 43x one-year forward earnings, although that is still below its five-year median of 50x.
Image Source: Zacks Investment Research
Illinois Tool Works
Over the last month and 12 months, the industrial sector ETF (XLI - Free Report) has been a relative leader. Industrials have remained strong during the rapid rise of interest rates over the last year.
Image Source: Zacks Investment Research
Illinois Tool Works (ITW - Free Report) is also a 110-year-old company, with a long history of earnings, and dividend growth. ITW is a manufacturer and seller of industrial tools through seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products. Illinois Tool Works has over 18,000 patents pending and produces products that are critical to the businesses they serve.
ITW has achieved such longevity because of its 'small-wins strategy' based on decentralization, simplicity, customer-focused innovation, and acquisitions, which should help it thrive during more challenging economic times.
Illinois Tool Works stock has very steadily appreciated and returned an average of 13% annually for the last 30 years, outperforming the S&P 500, which averaged 11%. Making it an even more stable stock is ITW’s dividend payment. ITW yields 2.2% and has increased by an average of 9% annually over the last five years.
Image Source: Zacks Investment Research
ITW has a Zacks Rank #2 (Buy), indicating upward trending earnings revisions. Earnings expectations have been revised higher across all timeframes.
Image Source: Zacks Investment Research
ITW is another stock with a premium valuation, reflecting its very high-quality business practices. It currently trades at 25x one-year forward earnings, which is above its five-year median of 23x, but well off its 2020 high of 36x.
Image Source: Zacks Investment Research
META
Meta Platforms (META - Free Report) , formerly Facebook, is one of the best performing stocks in the market this year. META is the world's largest social media platform. The company's portfolio evolved from a single Facebook app to multiple apps like photo and video sharing app Instagram and WhatsApp messaging app thanks to savvy acquisitions.
Across its product line META has 3 billion daily active users, and even Facebook, which is so commonly written off as a dying platform, still has nearly 2 billion DAUs.
META’s stock performance is something of an enigma. It is up 53% YTD, but performance is practically flat over the last five years. Over that same period sales have grown from $40 billion to $117 billion annually, while gross margins have remained near 80%. This bizarre setup is an opportunity for discerning investors.
Image Source: Zacks Investment Research
Whether interest rates are high or low, people and businesses are going to use Meta’s platforms to communicate and share. Even after its near 100% runup from the 2022 lows Meta stock is still trading at the lower end of its historical valuation. Trading at 18x one-year forward earnings, META is below its five-year median of 22x, and well below the industry average of 46x.
Image Source: Zacks Investment Research
Meta Platforms currently earns a Zacks Rank #2 (Buy), indicating upward trending earnings revisions.
Image Source: Zacks Investment Research
Bottom Line
A rising interest rate environment is something markets haven’t experienced in a long time. This shock is what caused stocks to tumble in 2022. Many investors have grown used to low rates, which for the last two decades has consistently pushed investors further out on the risk curve.
With higher interest rates, the hurdle rate for investors is also higher, so focusing on companies that have clearly proven their business models over a long period, and ideally offer a dividend are going to be a conservative and safe way to invest in this stock market regime. With those huge margins maybe even Meta will add a dividend down the road.