In this article, we discuss 10 stocks to buy for interest rate hikes.
In a rising rates environment, stocks tend to shed value as the anticipated future earnings decline. It is prudent to diversify a portfolio across different asset classes, preferring quality over quantity, understanding the level of risk, and rebalancing portfolios frequently to gain winners and drop losers in a highly dynamic market.
Economists and market experts are expecting the Federal Reserve to announce a third consecutive three-quarter point rate hike. Investors are yet again waiting to see how high the rates will go this time, and to what extent they can plunder the economy. Fed Chair Jerome Powell has indicated time and again that the rate hikes will continue until the inflation drops to 2%-3%. Economists expect the new rate hikes to be more restrictive and they can potentially limit economic growth and have a lasting impact. Diane Swonk, chief economist at KPMG, told CNBC on September 20:
“This is really moving into restrictive monetary policy territory. We will be moving into no man’s land. We actually haven’t tightened policy to fight inflation since the early 1980s. Their goal is for a prolonged slowdown that grinds inflation slowly down and only gradually increases the unemployment rate. Whether they get there is another issue.”
There has been a wide selloff in the equity market after a remarkably high August inflation report, where the CPI rose by 0.1%, while market experts predicted a decline after July data. The Fed’s latest rate hike will send borrowing costs to their highest level since the Great Recession.
In a report dated September 20, Forbes cited Keith Lerner, chief market strategist at Truist Advisory Services, who said that hedge fund managers surveyed by BofA are indicating signs of utmost bearishness. They prefer to sit on piles of cash and limit exposure to the stock market, as global GDP growth forecasts hover near a record low given the central bank’s tightening monetary policies. However, the financial services sector has historically benefited in a rising rates environment. Some of the stocks to buy amid interest rate hikes include Bank of America Corporation (NYSE:BAC), Arthur J. Gallagher & Co. (NYSE:AJG), and Chubb Limited (NYSE:CB).
Source: Federal Reserve.
Chairman Powell presents the Monetary Policy Report to the Senate Committee on Banking, Housing, and Urban Affairs. Report here: www.federalreserve.gov/monetarypolicy/2018-07-mpr-summary…
Our Methodology
Stocks from sectors that generally benefit from higher interest rates, such as financial services, insurance, and mortgage, were selected for this article. Positive analyst sentiment and strong business fundamentals were important classifiers for shortlisting the following stocks.
We have arranged the list according to the hedge fund sentiment around the securities, which was assessed from Insider Monkey’s Q2 2022 database of about 900 elite hedge funds.
Stocks to Buy for Interest Rate Hikes
10. Ashford Inc. (NYSE:AINC)
Number of Hedge Fund Holders: 1
Ashford Inc. (NYSE:AINC) is a Texas-based asset management firm that provides investment management and relevant services to the real estate and hospitality sectors. On August 3, Ashford Inc. (NYSE:AINC) posted earnings for the second quarter of 2022, reporting earnings per share of $2.21 and a revenue of $167.45 million, outperforming Wall Street consensus by $0.99 and $29.82 million, respectively.
On August 18, B. Riley analyst Bryan Maher raised the price target on Ashford Inc. (NYSE:AINC) to $23 from $19 and maintained a Neutral rating on the shares. The company reported Q2 results that exceeded expectations, primarily on the back of better than anticipated results at Ashford Inc. (NYSE:AINC)’s wholly owned subsidiary, Inspire – an event solutions company specializing in audio-visual, staging, and production, the analyst told investors in a research note.
According to Insider Monkey’s second quarter database, Jim Simons’ Renaissance Technologies held 85,353 shares of Ashford Inc. (NYSE:AINC) worth $1.19 million.
Like Bank of America Corporation (NYSE:BAC), Arthur J. Gallagher & Co. (NYSE:AJG), and Chubb Limited (NYSE:CB), Ashford Inc. (NYSE:AINC) is one of the stocks to buy for interest rate hikes.
9. Palomar Holdings, Inc. (NASDAQ:PLMR)
Number of Hedge Fund Holders: 9
Palomar Holdings, Inc. (NASDAQ:PLMR) was incorporated in 2013 and is headquartered in La Jolla, California. It is an insurance holding company, offering specialty property insurance to residential and commercial customers. Insurance companies stand to gain from rising rates, as they receive higher yield returns on underlying bond investments.
Keefe Bruyette analyst Meyer Shields on August 7 raised the price target on Palomar Holdings, Inc. (NASDAQ:PLMR) to $88 from $84 and maintained an Outperform rating on the shares after the Q2 results. The analyst anticipates sustainable and robust gross written premium growth and an improving expense ratio throughout and beyond 2022, which will elevate the stock over the next 12 months.
Among the hedge funds tracked by Insider Monkey, Palomar Holdings, Inc. (NASDAQ:PLMR) was part of 9 public stock portfolios at the end of Q2 2022, compared to 12 funds in the last quarter. Steve Cohen’s Point72 Asset Management is the largest stakeholder of the company, with 307,477 shares worth $19.80 million.
8. Stifel Financial Corp. (NYSE:SF)
Number of Hedge Fund Holders: 25
Stifel Financial Corp. (NYSE:SF) is a Missouri-based financial services and bank holding company, offering retail and institutional wealth management and investment banking services to individual investors, enterprises, municipalities, and institutions in the United States, the United Kingdom, Europe, and Canada. Stifel Financial Corp. (NYSE:SF) on August 3 declared a $0.30 per share quarterly dividend, which was paid on September 15. Stifel Financial Corp. (NYSE:SF) is one of the top stocks to buy for interest rate hikes.
On July 12, JMP Securities analyst Devin Ryan reaffirmed an Outperform rating on Stifel Financial Corp. (NYSE:SF) but lowered the price target on the stock to $100 from $103 as part of a broader research note on Alternative Asset Managers. After another tough quarter and with “likely some more pain ahead”, the bar on performance has plummeted, but the industry has priced in a recessionary environment, the analyst told investors. He added that from a price perspective, upside now decidedly outweighs the downside in the sector, and he sees most names “inevitably recovering and possibly making new highs” when the markets are stable.
According to Insider Monkey’s data, 25 hedge funds were bullish on Stifel Financial Corp. (NYSE:SF) at the end of the second quarter of 2022, with combined stakes exceeding $531 million. Israel Englander’s Millennium Management is the leading position holder in the company, with 2.40 million shares worth about $135 million.
7. OneMain Holdings, Inc. (NYSE:OMF)
Number of Hedge Fund Holders: 28
OneMain Holdings, Inc. (NYSE:OMF) is an Indiana-based financial holding company, engaged in the consumer finance and insurance businesses. The company provides personal loans, insurance products, credit cards, and membership plans. Rising interest rates will result in higher loan payments for OneMain Holdings, Inc. (NYSE:OMF), which will serve as a positive catalyst.
On August 2, RBC Capital analyst Kenneth Lee assigned an Outperform rating to OneMain Holdings, Inc. (NYSE:OMF) but lowered the price target on the stock to $51 from $62. While the analyst admitted that there is higher risk from an unpredictable macro environment for OneMain Holdings, Inc. (NYSE:OMF) and its non-prime customer segment, he thinks the downside is manageable. The analyst continues to like the company’s high ROTCE and capital generation potential.
According to the second quarter database of Insider Monkey, 28 hedge funds held stakes worth $621.5 million in OneMain Holdings, Inc. (NYSE:OMF), compared to 37 funds the prior quarter worth $866 million. Glenn Greenberg’s Brave Warrior Capital is the largest position holder in the company, with 2.8 million shares valued at $108 million.
Here is what ClearBridge Investments All Cap Value Strategy has to say about OneMain Holdings, Inc. (NYSE:OMF) in its Q4 2021 investor letter:
“Similar to the energy sector, the financial sector is also trading at very depressed multiples relative to the market. While the sector’s strong fundamentals received some recognition in 2021, it was rewarded with substantially lower valuations than it should have had. Despite earnings growing over 30% and exceeding the overall market’s, financial stock multiples stayed flat and are currently selling at a discount of roughly 9x forward earnings.
Consumer lender OneMain is an excellent representation of the divide between perception and reality. Similar to the market’s outlook on natural gas prices for EQT, the outlook for consumer credit metrics are worse than the current reality. It is inevitable that record-low delinquencies and loss rates will rise. However, the market’s perception of these headwinds to future earnings growth has been excessive. Higher loan losses are just one piece of a larger pie, and we believe that accelerating loan growth and associated operating leverage provides a buffer to allow OneMain to continue to compound earnings for the foreseeable future. Concerns about credit have completely overshadowed these positive drivers and have resulted in the stock trading at just 5x its projected cash earnings for 2022.”
6. First American Financial Corporation (NYSE:FAF)
Number of Hedge Fund Holders: 30
First American Financial Corporation (NYSE:FAF) is a California-based provider of financial services, operating through Title Insurance and Services, and Specialty Insurance segments. On August 24, First American Financial Corporation (NYSE:FAF) declared a $0.52 per share quarterly dividend, a 2% increase from its prior dividend of $0.51. The dividend was distributed on September 15. At the end of July, the board approved a $400 million share repurchase authorization. First American Financial Corporation (NYSE:FAF) is one of the stocks to buy in order to brace for interest rate hikes.
On July 13, Truist analyst Mark Hughes maintained a Buy rating on First American Financial Corporation (NYSE:FAF) but lowered the price target on the stock to $77 from $86. The analyst cited the company’s Q2 order count and the latest weekly application and rate lock data, both of which indicate mid-to-upper teen drops in monthly purchase orders. However, the analyst added that at 9.4-times his expected 2022 earnings, the valuation on the stock is attractive.
According to Insider Monkey’s Q2 data, 30 hedge funds were bullish on First American Financial Corporation (NYSE:FAF), compared to 31 funds in the earlier quarter. Parag Vora’s HG Vora Capital Management is the leading position holder in the company, with 10.85 million shares worth over $574 million.
In addition to Bank of America Corporation (NYSE:BAC), Arthur J. Gallagher & Co. (NYSE:AJG), and Chubb Limited (NYSE:CB), elite hedge funds are piling into First American Financial Corporation (NYSE:FAF) as a safe haven amid rising rates.
Here is what Ensemble Capital Management has to say about First American Financial Corporation (NYSE:FAF) in its Q4 2020 investor letter:
“A notable detractor from our performance came from our investment in First American Financial Corporation. The stock of this title insurance company is our only holding that generated negative returns in 2020. With the company generating revenue from both existing and new home transactions, we think it will benefit greatly from our thesis that home activity has been depressed and will increase significantly in the years ahead. The stock rebounded from the pandemic driven sell off from March to July but has been relatively flat since then. It generated a return of just over 2% in the fourth quarter. While there are some valid concerns about an outstanding legal case related to a cybersecurity breach in 2019, the stock trades at just nine times its pre-pandemic 2019 reported earnings.”
5. Arthur J. Gallagher & Co. (NYSE:AJG)
Number of Hedge Fund Holders: 31
Arthur J. Gallagher & Co. (NYSE:AJG) is an Illinois-based company that provides insurance brokerage, consulting, third-party claims settlement, and administration services globally. In August, Arthur J. Gallagher & Co. (NYSE:AJG) made multiple acquisitions of insurance firms, including Watkins Group, Hillsboro, Denver Agency, and Another Day. Arthur J. Gallagher & Co. (NYSE:AJG) is one of the best stocks to buy amid interest rate hikes.
On August 26, Argus analyst John Staszak initiated coverage of Arthur J. Gallagher & Co. (NYSE:AJG) with a Buy rating and a $215 price target. The analyst forecasts organic growth of 10% in Arthur J. Gallagher & Co. (NYSE:AJG)’s Brokerage segment in the second half of the year, which is higher than the management’s estimate of 9%. He also forecasts 10% growth in its Risk Management business. Prospects for higher interest rates, robust organic growth, and contributions from acquisitions led to his above-consensus EPS estimates of $8.00 for 2022 and $9.00 for 2023, the analyst told investors in a research note.
According to Insider Monkey’s Q2 data, 31 hedge funds were long Arthur J. Gallagher & Co. (NYSE:AJG), up from 24 funds in the prior quarter. Phill Gross and Robert Atchinson’s Adage Capital Management is the biggest stakeholder of the company, with 788,803 shares worth $128.60 million.
Here is what Cooper Investors Global Equities Fund has to say about Arthur J. Gallagher & Co. (NYSE:AJG) in its Q1 2022 investor letter:
“In terms of underlying businesses, the portfolio holdings are going well and largely reported solid numbers during earnings season with positive language around the outlook for 2022. Our insurance broker Arthur J Gallagher is a stand-out performer, delivering low-double-digit organic revenue growth at the same time as margin expansion – this is a business that benefit from higher interest rates, emerging risks and inflating premiums. While rising rates, supply chain constraints and war in Europe represent a myriad of challenges for many industries, our view is that our management teams are highly experienced focused operators. They are well equipped to deal with these challenges, having shown great resilience and flexibility during many crises, the most recent example (COVID) proving yet again the power of their business models.”
4. Radian Group Inc. (NYSE:RDN)
Number of Hedge Fund Holders: 31
Radian Group Inc. (NYSE:RDN) is a Pennsylvania-based company that provides mortgage and real estate services in the United States. The company offers private mortgage insurance, credit risk management, contract underwriting, and fulfillment solutions. Radian Group Inc. (NYSE:RDN) is one of the stocks to buy for interest rate hikes. The company paid a quarterly dividend of $0.20 per share to shareholders on September 1. The dividend yield on September 20 stood at 3.86%.
On August 18, BofA analyst Mihir Bhatia upgraded Radian Group Inc. (NYSE:RDN) to Neutral from Underperform with a price target of $24, up from $22.50. The company’s capital return in Q2 “was impressive” and while execution risk remains for the homogeneous segment, at present prices the stock offers 3% upside potential and 8% total return, the analyst told investors in a research note.
According to Insider Monkey’s data, 31 hedge funds were bullish on Radian Group Inc. (NYSE:RDN) at the end of June 2022, compared to 37 funds in the prior quarter. Peter Rathjens, Bruce Clarke, and John Campbell’s Arrowstreet Capital is the leading position holder in the company, with roughly 3 million shares worth $58.5 million.
3. Chubb Limited (NYSE:CB)
Number of Hedge Fund Holders: 35
Chubb Limited (NYSE:CB) is a Swiss company that provides insurance and reinsurance products worldwide. On August 11, Chubb Limited (NYSE:CB) declared a quarterly dividend of $0.83 per share, in line with previous. The dividend is payable on October 7, to shareholders of record as of September 16. The company has consistently increased its annual dividend payout for 29 years and is a member of the S&P 500 dividend aristocrats.
On July 12, Jefferies analyst Yaron Kinar reiterated a Buy recommendation on Chubb Limited (NYSE:CB) but lowered the price target on the shares to $244 from $247. His P&C insurance and insurtech estimates for the quarter “skew below Street” to factor in modest Russia-related losses and below average alternative investment returns. However, his primary underlying EPS forecast is ahead of the Street consensus for the group, the analyst told investors.
According to Insider Monkey’s second quarter data, 35 hedge funds were long Chubb Limited (NYSE:CB), up from 31 funds in the earlier quarter. Andreas Halvorsen’s Viking Global is the largest position holder in the company, with 3.7 million shares worth about $742 million.
In its Q1 2022 investor letter, Aristotle Capital Management, an asset management firm, highlighted a few stocks and Chubb Limited (NYSE:CB) was one of them. Here is what the fund said:
“Our investment in Chubb began in the fourth quarter of 2015, shortly after ACE Limited announced it would acquire the Chubb Corporation, creating the largest global property and casualty insurance company by underwriting income. During our nearly seven-year holding period, the company’s combination progressed leading to the realization of main catalysts we had identified. These included cost savings, broadened product offerings and an expanded customer base, as well as enhanced distribution capabilities and improved pricing due to scale. In addition, Chubb successfully grew its profitable high-net-worth personal lines. While we still consider Chubb to be a high-quality business, few catalysts remain after what was, in our opinion, a remarkable run of successful business execution. As such, we decided to step aside in favor of what we believe to be a more optimal investment in Blackstone.”
2. Ally Financial Inc. (NYSE:ALLY)
Number of Hedge Fund Holders: 42
Ally Financial Inc. (NYSE:ALLY) is a Michigan-based digital financial services company, serving consumer, commercial, and corporate customers primarily in the United States and Canada. The bank is diversifying its credit portfolio, controlling funding costs, and introducing favorable lending products, which will support robust book value growth into the future. The financials group is positioned to benefit from rising rates, which makes Ally Financial Inc. (NYSE:ALLY) one of the best stocks to buy amid interest rate hikes.
On September 15, Barclays analyst Jason Goldberg maintained an Overweight rating on Ally Financial Inc. (NYSE:ALLY) but lowered the price target on Ally Financial Inc. (NYSE:ALLY) to $49 from $56.
According to Insider Monkey’s data, 42 hedge funds held stakes worth $2.3 billion in Ally Financial Inc. (NYSE:ALLY) at the end of Q2 2022, compared to 49 funds in the last quarter worth $2.4 billion. Warren Buffett’s Berkshire Hathaway is the biggest stakeholder of the company, with 30 million shares valued at more than $1 billion.
Here is what Oakmark Fund has to say about Ally Financial Inc. (NYSE:ALLY) in its Q2 2022 investor letter:
“As for Ally Financial, fears of a recession drove the stock price down more than 20% for the period, but business fundamentals have remained strong and the shares now trade for just a mid-single-digit multiple of current earnings. We believe today’s price ignores the funding cost improvements and well-capitalized nature of Ally’s balance sheet. We continue to own both investments given their significant discounts to our estimates of business value.”
1. Bank of America Corporation (NYSE:BAC)
Number of Hedge Fund Holders: 99
Bank of America Corporation (NYSE:BAC) is an American multinational investment bank and financial services holding company. For Q3 2022, BofA guided for net interest income to be at least $900 million-$1 billion higher as compared to Q2. It remains one of the best stocks to buy for interest rate hikes.
On September 12, Deutsche Bank analyst Matt O’Connor assigned a Buy rating to Bank of America Corporation (NYSE:BAC) stock but lowered the price target on the shares to $45 from $51. Although banks have underperformed this year due to recession fears, the analyst said there is upside in the longer-term for the group if the US avoids a significant economic downturn.
According to the second quarter database of Insider Monkey, Bank of America Corporation (NYSE:BAC) was part of 99 hedge fund portfolios, with combined stakes worth approximately $36 billion. Harris Associates is a notable stakeholder of the company, with 49.4 million shares valued at $1.5 billion.
Miller Value Partners mentioned Bank of America Corporation (NYSE:BAC) in its Q1 2022 investor letter. Here is what the firm had to say:
“There are many times when volatility and beta give false signals. Banks outperformed in the post-tech bubble bear market of the early 2000s. At the market peak prior to the financial crisis (when risk was the highest in those names!), Bank of America (NYSE:BAC) had a 0.9x beta (based on the trailing 5 years) suggesting its “risk” was below the market’s. Wrong! It massively underperformed in the financial crisis. Realized beta over the 5 years from the pre-crisis’ 2006 peak measured 2.3x.
A much better indicator of actual risk, both before and after the financial crisis, was the quality of the balance sheet and risk-taking appetite. Beta is backwards looking and non-stationary. Relying on it underestimated risk going into the financial crisis and overestimated coming out of it (its beta has continued to fall over the past decade).
We care greatly about risk. We spend a significant amount of time thinking about the risks to our investments. We measure risk as permanent impairment of capital, which means the prices and values don’t bounce back. Business fundamentals determine risk.”
You can also take a look at 10 Monthly Dividend Stocks with Highest Yields and 10 Penny Stocks with High Growth Potential.
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Disclosure: None. 10 Stocks to Buy for Interest Rate Hikes is originally published on Insider Monkey.
