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Investment Ideas

The Fed’s next step is closely being watched by traders and investors. Last December, we saw our first interest rate hike since before the financial crisis and markets didn’t not respond well. Aggressive selling in oil and equity markets in January led to a short lived panic, but left a mark in the mind of money managers.

If rates go higher money becomes more expensive to borrow, leading to tighter margins and slower growth for businesses. The Fed seems to be okay with this, as market data has shown an economy with moderate growth.

Interest rates are likely going higher before the end of the year and there is a good chance that stocks see a short term correction after the Fed pulls the trigger. However, some stocks will benefit, especially in the financial sector.

Higher interest rates are better for banks as the net interest spread improves, this helps their profit margins. Financials have had a rough year to date, with the Financial Select Sector SPDR ETF (XLF - Free Report) up only 1.3%. This ETF is a great way to play an increase in rates, but the upside maybe limited.

Instead investors may want to look at highly ranked individual financial stocks to maximize their reward. Below are Zacks Rank #1 (Strong Buy) or #2(Buy) that will benefit from a rate hike this December.

 

Bank of America (BAC - Free Report) is a Zacks Rank #2 (Buy) that is one of the world's leading financial services companies. The company provides banking and financial products and services for individual consumers, small and middle-market businesses, institutional investors, large corporations, and governments worldwide. Bank of America has 213,000 employees and is based in Charlotte, North Carolina.

The company has a market cap of $168 Billion with a Forward PE of 12. The stock sports Zacks Style Scores of “F” in both Growth, but an “A” Momentum. BAC pays a dividend of 1.80% and has expected EPS growth of 7%.

Q3 earnings came out in early October, with the company seeing a 20% beat on EPS.  Over the last month, estimates have been revised 12% higher, from $0.32 to $0.22, for fiscal year 2016. If rates head higher, profit margins will improve and analyst will likely take their numbers even higher.

JPMorgan Chase (JPM - Free Report) is a Zacks Rank #2 (Buy) that is a financial services firm that engages in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, asset management and private equity. Chase has over 234,000 employees and is based in New York, New York.

The company has a market cap of $250 Billion with a Forward PE of 12. The stock sports Zacks Style Scores of “F” in Growth, but “B” in Momentum. JPM pays a dividend of 2.75% and has expected EPS growth of 6%.

JPM reported in early October with a 13% beat.  Much like BAC, estimates have been revised higher over the last 30 days. For the current year, we have seen estimates rise almost 4%, from $5.61 to $5.82.

The EPS beat was the fourth straight and the sixth out of the last seventh. The momentum will look to continue with a rate hike.

People’s Utah Bancorp (PUB - Free Report) is a Zacks Rank #1 (Strong Buy) that is a small regional bank based in Utah.  The company offers a range of deposit services, including checking accounts, savings accounts, and time deposits. It also provides a range of short-term to long-term commercial, personal, and mortgage loans.

The company is much smaller than the well-known banks named above, with only a $350 million market cap. The stock has a forward PE of 11 and sports Zacks Style Scores of “B” in Momentum. WFC pays a dividend of 1.40% and has expected EPS growth of 8%.

Earnings were out just last week, when the company beat by 6%. Looking forward, estimates are heading higher for all time frames, with the current quarter showing a 9% rise. The advantage of a smaller reginal bank is that the effect of rates will move the needle more, thus PUB has bigger upside then the big banks.

CenterState Banks (CSFL - Free Report) is a Zacks Rank #1 (Strong Buy) that is another smaller regional bank with a focus in the Florida region.  As of August 12, 2016, it had 57 branches in 20 counties of Florida; and a loan production office in Macon, Georgia. The company was founded in 1989 and is headquartered in Davenport, Florida.

The company has a market cap of $880 million with a forward PE of 14. The stock sports Zacks Style Scores of “C” in Growth and “B” in Momentum. CenterState pays a dividend of 0.87%.

CenterState reported earnings in mid-October with and saw a 6% EPS beat. Over the last 30 days, estimates have gone 3.3% higher for the current quarter. If rates go higher, expect analysts to reevaluate their estimates.

In summary

Banks are the way to play an interest rate hike. It’s coming, most likely in December. So position yourself with top-ranked banks in order to benefit form the pop that the banks will likely see.

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