A double-edged sword if there ever was one, the September jobs report effectively put the Federal Reserve in a bind, catalyzing the case for stocks for rising interest rates. Sure, on the one hand, most governments aim for a robust labor market. Happy, employed workers obviously tend to be satisfied, thus reducing pressure on policymakers.
However, a darker side exists to a surprisingly strong print. For the Fed, that dark side threatens to undermine its efforts to contain inflation. Mathematically, we’re talking about more dollars chasing after fewer goods, which is the exact opposite of what the central bank wants at the moment. Therefore, spiked borrowing costs may be in order, thus the relevance of stocks for rising interest rates.
Of course, the Fed can’t go all Rambo on inflation and spike rates to the moon. Otherwise, the economy will almost surely fall into recession. But not doing enough can also cause long-lasting pain. With such a delicate balancing act at play, investors may want to consider these stocks for rising interest rates.
An insurance giant, Allstate (NYSE:ALL) benefits from a captive audience. Sure, I suppose it’s possible to go through life without financially securing your most important assets. However, with so many disasters liable to destroy your dreams in an instant, it’s extremely foolish to do so. Basically, Allstate “preys” on that very reasonable fear, making it one of the top stocks for rising interest rates.
Notably, Allstate doesn’t exactly offer sterling financials. For example, its balance sheet could use some shoring up, particularly with its high debt load relative to cash. Also, the company’s trailing-year net margin sits 4.8% below breakeven. However, on the positive side, Allstate prints a three-year revenue growth rate of 14.2%, above 81.84% of sector rivals.
Better yet, ALL trades at only 0.57x trailing revenue. That’s noticeably below the sector median value of 0.95x. Finally, analysts rate ALL a consensus moderate buy with a $129.33 price target, implying over 7% growth.
One of the largest global providers of insurance, annuities and employee benefit programs, MetLife (NYSE:MET) might not be a particularly exciting enterprise. Nevertheless, as a provider of key relevant services, MET ranks among the best stocks for rising interest rates. Admittedly, its performance in the charts – down 14% on a year-to-date basis – doesn’t provide confidence right now. However, that could change over time.
Fundamentally, I believe that the Covid-19 crisis, along with other high-profile incidents has forced people to consider the fragility of human life. As a major provider of life insurance products, MetLife may cynically benefit from this framework. Also, the red ink offers an attractive valuation. Right now, shares trade at only 6.75x forward earnings, favorably lower than nearly 75% of MetLife’s peers.
Also, the company offers a forward yield of 3.35%. Combined with a low (and thus sustainable) payout ratio of 22.51%, MET is quite enticing. Analysts peg shares a strong buy with a $77.64 target, implying over 25% upside.
Headquartered in Chicago, Illinois, Exelon (NASDAQ:EXC) is the largest electric parent company in the U.S. by revenue. Further, per its public profile, Exelon is the largest regulated electric utility in the nation with approximately 10 million customers. While it should theoretically be one of the top stocks for rising interest rates, the market has other ideas.
Since the beginning of this year, EXC slipped more than 7%. While not particularly encouraging, shares also gained nearly 5% of equity value in the week ending Oct. 13. So a comeback may be materializing. It wouldn’t be all that surprising again given the underlying relevance.
To be fair, like other utilities, Exelon features questionable financials. However, it stands out in the bottom line, with the enterprise consistently posting annual net income. Also, it offers a forward yield of 3.6%. Analysts rate shares a strong buy with a $44 target, implying just over 10% upside.
American Water Works (AWK)
Another utility player, American Water Works (NYSE:AWK) provides water and wastewater services in the U.S. According to its corporate profile, the company offers these services to approximately 1,700 communities in 14 states. Overall, the enterprise covers a population of approximately 14 million through 3.4 million customer connections. Still, like other utilities, AWK printed red ink thus far in the year.
Since the January opener, AWK suffered a loss of more than 23%, which obviously presents concerns. Further, in the trailing month, shares fell over 16%. Financially, AWK doesn’t immediately stand out (at least for good reasons). For example, it’s still overpriced at 23x forward earnings.
Nevertheless, AWK is one of the best stocks for rising interest rates thanks to the captive audience angle. As a result, it’s consistently profitable thanks to incredibly strong margins. Lastly, analysts peg AWK as a moderate buy with a $144.75 price target, projecting nearly 23% growth.
As a supermarket and multi-department store operator, Kroger (NYSE:KR) is well positioned as one of the top stocks for rising interest rates. Again, we’re talking about a captive audience. No matter how advanced society becomes, humans need to eat. Because it’s such an essential service, Kroger should benefit if circumstances get squirrely. Yes, it’s choppy right now but the turbulence may end soon enough.
Granted, I understand the hesitation. Since the January opener, KR lost about 1% of its equity value. In the past 365 days, it moved up a bit over 2%, hardly groundbreaking stuff. Still, the underperformance also means that KR trades at an attractive valuation. Currently, the market prices shares at a forward earnings multiple of 9.86X. In contrast, the sector median stat comes in at 13.55x.
Also, the company enjoys solid and predictable long-term revenue growth. Combine that with a forward yield of 2.63% and you have a winner for the long haul. Analysts rate KR a moderate buy with a $54.29 target, implying 23% upside.
While the concept of stocks for rising interest rates tends to focus on reliable but boring fare, I decided to spice things up for the final two ideas. First, Fortinet (NASDAQ:FTNT) could entice forward-thinking investors thanks to its core cybersecurity business. With the world increasingly becoming digitalized at a rapid pace, the evolution sparked myriad conveniences. However, it also led to nefarious online activities.
Even more troubling, major enterprises have suffered significant pain due to cyberattacks. Most recently, Clorox (NYSE:CLX) revealed the extent of the financial damages related to an attack in August this year. Upon disclosure, CLX saw multiple investors rush for the exits. Basically, the lesson here is that enterprises can’t afford to get cheap with their cybersecurity.
Effectively, Fortinet enjoys a captive audience, much like insurance providers. So, it’s worth looking into if you anticipate higher borrowing costs. Analysts peg FTNT as a strong buy with a $75.91 target, implying over 31% growth.
Kelly Services (KELYA)
An office staffing firm operating globally, Kelly Services (NASDAQ:KELYA) might seem a questionable idea for stocks for rising interest rates. After all, with the job market so hot, people don’t necessarily need intermediaries. That might be the case now. However, several months down the line, the narrative could change – and change favorably for KELYA.
Conspicuously, while other competitors in the space suffered poor chart performances, KELYA is in the black. Since the January opener, shares gained over 8%. While nothing to write home about, Kelly may be in a position to add to its gains. Fundamentally, the company facilitates working opportunities across a range of occupations, not just office jobs. That’s a key advantage should higher rates cause people to get desperate in a downcycle.
Also, it’s worth pointing out that KELYA trades at a forward earnings multiple of 10.43x. That’s noticeably lower than the sector median of 13.62x. On a final note, analysts rate KELYA as a moderate buy with a $25.50 target, projecting 39% upside.
On the date of publication, Josh Enomoto did not have (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.