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5 Stocks to Buy as Rate Hike Prospects Rise

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On Friday, comments from key Fed officials heightened prospects of a rate hike in the near term. The traditionally dovish Eric Rosengreen signaled that refraining from hiking rates any longer could harm the economy. Meanwhile, Daniel Tarullo sought further indications of rising inflation but added that he was open to a rate hike this year.

Meanwhile, Fed Governor Lael Brainard is due to speak on policy issues at an event on Monday. Historically known for her dovish approach, it is expected that she may adopt a different stance so as to raise market expectations about a hike. These events indicate that a near term rate hike is in the offing and it may be a good idea to pick stocks likely to benefit in such an event.

Officials Strike Hawkish Tone

Boston Fed President Eric Rosengreen said that the Fed was running the risk of harming the economy if it held off raising rates for too long. Instead, steadily raising rates may be a more appropriate approach. Rosengreen admitted that external economic weaknesses remain a concern. However, he felt the U.S. economy had shown enough resilience in the face of such worries.

Rosengreen felt the central bank runs the chance of overheating the economy if it holds off raising rates any longer. Speaking to CNBC, Federal Reserve Governor Daniel Tarullo said he was looking for further evidence of steady inflation before taking another rate hike into consideration. However, Tarullo refused to rule out a rate hike later this year altogether.

Banks, Insurers to Gain

Rosengreen’s hawkish comments led to a broad downturn in stocks on Friday. The S&P 500 lost 2.5% on Friday, suffering its worst decline in two months. However, barring an overall market decline, stocks of banks and insurers are likely to gain going forward and such signs are already evident.

The KBW Nasdaq Bank Index which comprises several large banks, such as Wells Fargo WFC and Bank of America BAC, increased 7% in August while the S&P 500 declined marginally. The index remains in the red year-to-date but several factors may already be working in the favor of stocks from these sectors.

A hike in rates will unequivocally benefit banks and insurers. Firstly, profits for banks rise when rates move higher, since their spread will also increase. Secondly, most bank stocks are trading at a cheaper price compared to the overall market. This is also what makes them likely to succeed moving forward. While benchmarks suffered a grievous fall last Friday, the KBW Nasdaq Bank lost only 1%.

Similarly, the SPDR S&P Insurance ETF (KIE) lost slightly more than 1%. The index gained more than 4% over the month of August. For insurance companies, investment income forms a major revenue component. A low rate puts pressure on investment income and in turn on investment yields. Hence any increase in the interest rate would lead to gains for insurers. (Read: 4 Insurance Stocks to Buy Before a Rate Hike)

Our Choices

At this point, it is difficult to predict whether the Fed will indeed raise rates at its September meeting. But given the tone of the comments of Fed officials, the likelihood of a rate hike in the near term seems to have increased.

Adding stocks which will gain from higher rates would a smart choice at this point. However, picking winning stocks may prove to be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Heartland Financial USA, Inc. HTLF is a multi-bank holding company that provides full-service retail banking through bank subsidiaries.

Heartland Financial has a Zacks Rank #2 (Buy) and a VGM Score of B. The company has expected earnings growth of 8.8% for the current year. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 11.98, lower than the industry average of 15.23.

Two River Bancorp TRCB is a bank holding company of the Two River Community Bank that provides banking services to small and medium-sized businesses, professionals, and individual consumers

Two River Bancorp has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 11.5% for the current year. It has a P/E (F1) of 13.18, which is lower than the industry average of 15.66.

Southern First Bancshares, Inc. SFST is the holding company for the Southern First Bank which offers a variety of banking services and products in South Carolina.

Southern First Bancshares has a VGM Score of B. The company has expected earnings growth of 28.8% for the current year. It has a P/E (F1) of 14.89, which is lower than the industry average of 15.59. The stock has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CNO Financial Group, Inc. CNO is a top-tier holding company for a group of insurance companies operating throughout the U.S.

CNO Financial Group has a Zacks Rank #2 and a VGM Score of B. The company has a P/E (F1) of 11.28, which is lower than the industry average of 12.40. Its earnings estimate for the current year has improved by 0.2% over the last 30 days.

Reinsurance Group of America Inc. (RGA - Free Report) is an insurance holding company primarily engaged in traditional individual and group life, asset-intensive, critical illness and financial reinsurance.

Reinsurance Group of America has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 12.1% for the current year.

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