The Fed is expected to raise rates by another 75 basis points during the next meeting. Considering that inflation continues to remain high, it is likely that the Fed Funds rates are headed above 3%, and rates are likely to top out anywhere between 3-4%.
Although some of the key areas in which inflation has occurred, such as energy and automobiles have started to witness a slow decline in prices.
During rising rate environments, certain stocks may benefit as their interest income rises. Consider the following stocks for your portfolio if you’re looking for stocks that may benefit in such a situation.
MetLife NYSE: MET
Inc. is a holding corporation for the Metropolitan Life Insurance Company and its affiliates. MetLife is among the largest global providers of insurance, annuities, and employee benefit programs, with its presence in 60 countries with 90 million worldwide. Metlife is expected to benefit as the interest rates on their premiums or ‘float’ go up, which should result in improved margins during the next couple of quarters, as income from premium investments increases. Metlife reported a strong first quarter with income coming to $1.7 billion or $2.08 per that was above the market consensus.
The stock is down 18% from its 52-week high and currently trades at 7x price-to-earnings. MetLife also trades significantly below its enterprise value which is currently at $73 billion. Considering the business is not capital intensive, trading that is far below its enterprise value, especially if the risk of tail-risk events, which may result in a large claim, is low, means the stock is trading below intrinsic value.
Although MetLife has a relatively low return on equity, when compared to other insurance companies such as Manulife, which has a return on equity, it may still have value. What’s important to note is that the stock currently provides a dividend yield of 6%, which is useful for those looking to hedge against the current environment. Furthermore, MetLife's global presence and continued improvement in its international exposure will see consistent revenue growth in the future. Finally, interest rates are not going up only in the United States, they are going up globally, which should the portfolio across the board. Consider MetLife if you're looking for a stock that will weather the current environment and continue to provide steady returns over a longer time period.
Charles Schwab (NYSE: SCHW)
is a financial services company and a stockbroker, that offers an electronic trading platform and offers a range of products including stocks, preferred stocks, fixed income, etc. The company makes its money both on trading volume and offering margins. Trading volumes are likely to be affected this year, with margin levels also expected to come down. But margin interest should improve. Charles Schwab remains one of the most prominent brokers in the U.S. brokerage industry and added over 1 million new brokerage accounts during the latest quarter. The stock is down over 34% from its 52-week high.
Charles Schwab during the latest quarter witnessed its net revenue increase by 13%, driven primarily by a 31% increase in net interest income. The stock currently trades at a price-to-earnings of 22x, which may be considered slightly overvalued considering the rising rate environment. But should trading volumes pick up again during the second quarter, the stock could see some upside, as higher volumes translate into higher earnings.
Alliance Bernstein NYSE: AB
, is one of the most prominent asset managers. The asset manager has around $780 billion in assets under management and will continue to deploy cash in higher interest-bearing assets. Asset managers also deal with a large number of fixed income assets that should benefit from a rising rate environment. Alliance Bernstein currently trades at 10x earnings, but has a dividend of almost 10%, which makes it perfect for the current inflationary environment.
Alliance Bernstein should also be less volatile considering it has much more exposure to fixed income than to equities, which makes the stock friendly for those that are looking to overcome short-term volatility and invest for the long term. The mutual fund industry should in general continue to do well over the longer term.
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