8 Stocks to Sell as Fed Continues To Raise Interest Rates in 2019

8 Stocks to Sell as Fed Continues To Raise Interest Rates Posted on Monday, October 1st, 2018 by Chris Markoch

The Federal Reserve is increasing their benchmark federal funds rate which has the predictable effect of having industry analysts attempting to predict winners and losers. In reality, a rise in interest rate should really not have much direct effect on stocks. As you might expect, financial stocks – such as banks – would be expected to benefit from an increase. Other industries, such as real estate companies, utilities, and even some technology stocks tend to see a decrease in price as rates begin to rise. This occurs due to a variety of factors from investors shifting capital away from dividend yields to businesses seeing a higher cost to borrow money to fund their growth.

The stocks below show the possibility of being affected by rising interest rates. They vary by sector, but all are showing some fundamental, and in some cases, technical reasons for caution as investors move forward.

#1 - Caterpillar Inc. (NYSE:CAT)

Caterpillar logo

Caterpillar Inc. (NYSE: CAT) - Caterpillar faces the vexing problem of being an overvalued stock in an industry that’s typically negatively affected by higher interest rates. The intrinsic value of the stock based on projected cash flow appears to be overvalued. Other fundamental metrics working against the stock are overvalued assets and earnings compared to the U.S. Machinery industry average. The company’s stock is also considered to be a poor value based on next year’s anticipated growth. However, their projected future earnings and revenues are supposed to grow, albeit at a rate that doesn’t indicate high growth. Caterpillar reported exceptionally strong first quarter results that the company itself acknowledged may be the high water mark for the industry. The company was also seeing a lot of its growth coming from sales to China which are currently being affected by the ongoing trade war between China and the Trump administration. Rising interest rates at home and the potential for declining sales abroad along with some unfavorable metrics should give investors caution going forward.

About Caterpillar
Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. Its Construction Industries segment offers asphalt pavers, compactors, cold planers, feller bunchers, harvesters, motorgraders, pipelayers, road reclaimers, skidders, telehandlers, and utility vehicles; backhoe, knuckleboom, compact track, multi-terrain, skid steer, and track-type loaders; forestry and wheel excavators; and site prep and track-type tractors. The company's Resource Industries segment provides electric rope and hydraulic shovels, draglines, rotary drills, hard rock vehicles, track-type tractors, mining trucks, longwall miners, wheel loaders, off-highway and articulated trucks, wheel tractor scrapers, wheel dozers, landfill and soil compactors, machinery components, electronics and control systems, select work tools, and hard rock continuous mining systems. Its Energy & Transportation segment offers reciprocating engine powered generator sets; reciprocating engines and integrated systems for the power generation, marine, oil, and gas industries; turbines, centrifugal gas compressors, and related services; remanufactured reciprocating engines and components; and diesel-electric locomotives and components, and other rail-related products. The company's Financial Products segment provides operating and finance leases, installment sale contracts, working capital loans, and wholesale financing; and insurance and risk management products. Its All Other operating segment manufactures filters and fluids, undercarriage, ground engaging tools, fluid transfer products, precision seals, and rubber sealing and connecting components; parts distribution; integrated logistics solutions and distribution services; and digital investments services. The company was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986. The company was founded in 1925 and is headquartered in Deerfield, Illinois.

Current Price: $134.15
Consensus Rating: Hold
Ratings Breakdown: 15 Buy Ratings, 11 Hold Ratings, 2 Sell Ratings.
Consensus Price Target: $149.4214 (11.4% Upside)

#2 - Hewlett-Packard Enterprise Company (NYSE:HPE)

Hewlett Packard Enterprise logo

Hewlett-Packard Enterprise Company (NYSE: HPE) - The watchword for Hewlett-Packard is uncertainty. To be sure, Hewlett-Packard's growth has outperformed the industry over the past five years. However, its future growth is less certain with some analysts suggesting that the future may not be as bright. Earnings are expected to decline in the next three years and revenues are supposed to grow at well below the industry and U.S. market averages. Adding to the mixed results is a Return on Equity (ROE) that will be below the industry average. HPE has a current share price is overvalued at $16.31 compared to its projected cash flow value of $10.02. This speaks to the idea that HPE's intrinsic value may not be accurately reflected in its stock price. Although not necessarily considered a high-growth stock option, the company does pay a consistent dividend. Income investors should be aware that the dividend yield is below the average of the top 25% of dividend-paying companies in the U.S.

About Hewlett Packard Enterprise
Hewlett Packard Enterprise Company operates as a technology company. The company operates through four segments: Hybrid IT, Intelligent Edge, Financial Services, and Corporate Investments. The Hybrid IT segment provides industry standard servers for multi-workload computing; mission-critical servers; converged storage solutions, including all-flash arrays and hybrid storage solutions; and traditional storage solutions comprising tape, storage networking, and disk products, such as HPE MSA and HPE XP. It also offers data center networking products, such as top-of-rack switches, core switches, and open networking switches; and operational services, advisory and professional services, and communications and media solutions. The Intelligent Edge segment provides solutions for mobility and Internet of things, as well as enterprise networking and security solutions for businesses campus and branch environments under the Aruba brand. This segment also offers wired and wireless local area network products, such as Wi-Fi access points, switches, routers; and software products, including network management, network access control, analytics and assurance, and location services software. The Financial Services segment offers various flexible investment solutions, which comprise leasing, financing, IT consumption, and utility programs and asset management services for customers to enable the creation of unique technology deployment models and acquire complete IT solutions. The Corporate Investments segment is involved in Hewlett Packard labs and various business incubation activities. The company serves small and medium-sized businesses and large enterprises. It has strategic alliance with ABB Ltd. Hewlett Packard Enterprise Company was founded in 1939 and is headquartered in Palo Alto, California.

Current Price: $15.88
Consensus Rating: Hold
Ratings Breakdown: 4 Buy Ratings, 7 Hold Ratings, 3 Sell Ratings.
Consensus Price Target: $17.20 (8.3% Upside)

#3 - NetApp, Inc. (NASDAQ:NTAP)

NetApp logo

NetApp, Inc. (NASDAQ: NTAP) - The question for NetApp would be in a sector dominated by competitors like Amazon and Microsoft, is there enough growth to go around? Comparing the stock price to its projected cash value suggests that the intrinsic value of the stock may be less than its current share price. But that is not atypical of tech companies. Like many companies in this sector, NetApp’s stock price bakes in future performance. This is not a bad stock, but technology is traditionally a sector that can be negatively affected by higher interest rates. NetApp experienced negative growth last year and that has been a trend for the company for the last five years. And although their Return on Equity (ROE) has improved over the last few years, they are still below the industry average. Value investors looking for dividends can find better options than NetApp, which has a dividend yield well below the upper 25% of dividend-paying companies.

About NetApp
NetApp, Inc. provides software, systems, and services to manage and share data on-premises, and private and public clouds worldwide. It offers cloud data services, such as ONTAP cloud storage data management and NetApp cloud sync data synchronization services; NetApp SaaS backup for Microsoft Office 365; NetApp cloud backup solutions; OnCommand management software and management integration tools; and NetApp private storage for cloud. The company also provides cloud Infrastructure solutions, including FlexPod, a portfolio of pre-validated designs and integration; NetApp advisor converged systems; NetApp HCI enterprise-scale hyper converged cloud infrastructure; and NetApp StorageGRID Webscale object storage software. In addition, it offers storage systems and software, such as all-flash arrays that support data management; hybrid arrays to deploy the speed of flash storage; NetApp ONTAP storage operating system; NetApp ONTAP Select, which offers robust enterprise storage services; NetApp flex array storage virtualization software; NetApp SnapCenter backup management software; NetApp SnapMirror data replication software; NetApp MetroCluster business continuity software; NetApp SnapLock data compliance software; SANtricity storage operating system; and NetApp SolidFire element operating systems. In addition, it provides software and hardware maintenance, professional, and customer education and training services, as well as support solutions. The company serves energy, financial services, government, high technology, Internet, life sciences, healthcare services, manufacturing, media, entertainment, animation, video postproduction, and telecommunications sectors through a direct sales force and channel partners. NetApp, Inc. has a strategic partnership with Lenovo to help customers modernize IT and enhance their digital transformation. NetApp, Inc. was founded in 1992 and is headquartered in Sunnyvale, California.

Current Price: $66.60
Consensus Rating: Hold
Ratings Breakdown: 16 Buy Ratings, 8 Hold Ratings, 4 Sell Ratings.
Consensus Price Target: $77.6646 (16.6% Upside)

#4 - American Water Works Company (NYSE:AWK)

American Water Works logo

American Water Works Company (NYSE: AWK) - Utility stocks are notoriously affected by rising interest rates. But that shouldn't be the sole reason for investors to be cautious about American Water Works. The larger problem for the company is a Return on Equity (ROE) that was less than 20%, putting it below the industry average. Since return on equity is a measure of how efficiently a company is using their assets, it's fair to say that AWK has not been using its assets as efficiently as the industry average in the past year. However, that continues a trend that is also reflected by return on capital employed figure that has not improved since 2016. AWK's year-over-year earnings growth has been positive over the past five years. But in the past year, they have reported negative earnings growth. Other factors that may weigh on the stock include balance sheet and debt concerns.  In the next year, AWK’s commitments exceed their cash holdings and other assets and the company’s debt level compared to net worth of 145.8% is greater than 40% and has increased from 126.4% five years ago. Operating cash flow is less than 20% of their total debt.

About American Water Works
American Water Works Company, Inc., through its subsidiaries, provides water and wastewater services in the United States and Canada. It offers water and wastewater services to approximately 1,600 communities in 16 states. The company operates approximately 72 surface water treatment plants; 527 groundwater treatment plants; 8 combined treatment plants; 127 wastewater treatment plants; 50,382 miles of transmission, distribution, and collection mains and pipes; 1,103 groundwater wells; 1,428 water and wastewater pumping stations; 1,313 treated water storage facilities; and 80 dams. It also undertakes contracts with the United States government to provide water and wastewater services on various military bases; and municipal, commercial, and industrial customers, primarily to operate and manage water and wastewater facilities, as well as provide other related services. In addition, the company provides warranty-type services to homeowners and smaller commercial customers to protect against the cost of repairing broken or leaking water pipes or clogged or blocked sewer pipes, interior electric lines, heating and cooling systems, and water heaters, as well as power surge protection and other related services; and water sourcing, transfer services, pipeline construction, and water storage solutions for natural gas exploration and production companies. Further, it supplies water to public fire hydrants for firefighting purposes, and private fire customers for use in fire suppression systems in office buildings and other facilities, as well as to other water utilities and community water systems. The company serves approximately 15 million people with drinking water, wastewater, and other water-related services in 46 states; the District of Columbia; and Ontario, Canada. The company was founded in 1886 and is headquartered in Camden, New Jersey.

Current Price: $104.35
Consensus Rating: Buy
Ratings Breakdown: 7 Buy Ratings, 2 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $98.7688 (-5.3% Upside)

#5 - Parsley Energy (NYSE:PE)

Parsley Energy logo

Parsley Energy (NYSE: PE) - There is positive and negative surrounding Parsley Energy’s stock. On the positive side, some analysts gave the company positive earnings expectations of 225% over the next three years, highlighted by double-digit, top-line growth in 2019. This would seem to suggest that the company is ready for a period of strong, sustainable growth. On the other hand, it’s a proven fact that at least a few company insiders have sold shares of stock, which is never considered a positive sign. Are they questioning the ability of the company to maintain their pace of growth or maybe they perceive that their stock price is overly inflated. Add to that, several technical indicators are not in Parsley's favor. They are showing signs that their stock is ready to turn downward which would test their 52-week low around $21 per share. What's uncertain is if some of the declines have to do with analysts already factoring in interest rate hikes.

About Parsley Energy
Parsley Energy, Inc., an independent oil and natural gas company, engages in the acquisition, development, production, exploration, and sale of crude oil and natural gas properties in the Permian Basin in West Texas and Southeastern New Mexico. As of December 31, 2017, its acreage position consisted of 219,747 net acres, including 174,392 net acres in the Midland Basin and 45,355 net acres in the Delaware Basin; and 241.0 net producing horizontal wells and 731.5 net producing vertical wells, as well an estimated proved oil and natural gas reserves were 416.4 MMBoe. The company was founded in 2008 and is headquartered in Austin, Texas.

Current Price: $18.09
Consensus Rating: Buy
Ratings Breakdown: 25 Buy Ratings, 4 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $32.32 (78.7% Upside)

#6 - Antero Resources (NYSE:AR)

Antero Resources logo

Antero Resources (NYSE: AR) - The outlook for Antero Resources really depends on how you view the status of natural gas going into 2019. Recently Morgan Stanley and Goldman Sachs projected a bearish outlook for natural gas, with some estimates projecting prices around $2.50 MMbtu. Antero is fully hedged at a production price of $3.50 MMbtu through 2019. Nevertheless, stocks often trade on the news and the bearish forecast for natural gas was largely responsible for Antero's stock correcting by over 7%. Currently, the stock is considered to be overvalued based on earnings compared to both the U.S. Oil & Gas Industry Average as well as the overall U.S. market. However, the company is said to be a good value compared to the industry based on assets and growth. The stock price has struggled to regain its momentum despite a recent rise in energy prices – a trend that looks like it could be ready to reverse. Antero's revenue forecast missed analysts' expectations. If they miss on their next earnings report on October 31st, it could cause the stock price to decline even further.

About Antero Resources
Antero Resources Corporation, an independent oil and natural gas company, acquires, explores for, develops, and produces natural gas, natural gas liquids, and oil properties in the United States. As of December 31, 2018, the company had approximately 486,000 net acres in the southwestern core of the Marcellus Shale; 125,000 net acres in the core of the Utica Shale; and 209,000 net acres of Marcellus Shale leasehold. It also owned and operated 289 miles of gas gathering pipelines in the Marcellus Shale; 17 compressor stations in the Marcellus Shale; 108 miles of low-pressure and high-pressure gathering pipelines in the Utica Shale; 8 miles of high-pressure pipelines; and 2 compressor station in the Utica Shale. The company had estimated proved reserves of 18.0 trillion cubic feet of natural gas equivalent, including 11.4 trillion cubic feet of natural gas; 554 million barrels of ethane; 498 million barrels of primarily propane, isobutane, normal butane, and natural gasoline; and 46 million barrels of oil. The company was formerly known as Antero Resources Appalachian Corporation and changed its name to Antero Resources Corporation in June 2013. Antero Resources Corporation was founded in 2002 and is headquartered in Denver, Colorado.

Current Price: $8.54
Consensus Rating: Hold
Ratings Breakdown: 4 Buy Ratings, 8 Hold Ratings, 1 Sell Ratings.
Consensus Price Target: $19.05 (123.1% Upside)

#7 - Kilroy Realty (NYSE:KRC)

Kilroy Realty logo

Kilroy Realty (NYSE: KRC) - Real estate stocks are particularly sensitive to rises in interest rates, and Kilroy was reporting problems before the latest interest rate hike. Their stock fell almost 7% since it reached its 52-week high in July. It has stayed below its 50-day moving average. With a current stock price in the low 70s, the question is if investors will see the stock as fairly valued or undervalued. In a rising interest rate environment, it's fair to say there may still be room for the stock to drop. However, that's hard to say since it's been a while since the markets have had to truly factor in higher interest rates. The real estate investment trust (REIT) is scheduled to report earnings on October 24, where they forecasted an increase in earnings per share and revenue. However, analysts will be interested to see how the latest interest rate hike may affect their earnings report and impact future guidance. Investors looking for good news on this stock can point to its Funds from Operation (FFO) that suggests the majority of its $347 million in earnings are high-quality and recurring.

About Kilroy Realty
Kilroy Realty Corporation (KRC), a publicly traded real estate investment trust and member of the S&P MidCap 400 Index, is one of the West Coast's premier landlords. The company has over 70 years of experience developing, acquiring and managing office and mixed-use real estate assets. The company provides physical work environments that foster creativity and productivity and serves a broad roster of dynamic, innovation-driven tenants, including technology, entertainment, digital media and health care companies. At December 31, 2018, the company's stabilized portfolio totaled approximately 13.2 million square feet of office space located in the coastal regions of Los Angeles, Orange County, San Diego, the San Francisco Bay Area and Greater Seattle and 200 residential units located in the Hollywood submarket of Los Angeles. The stabilized portfolio was 94.4% occupied and 96.6% leased. In addition, KRC had three projects under construction totaling approximately 1.3 million square feet of office space that was 37% leased, 801 residential units and 96,000 square feet of retail space that was 91% leased, as well as two projects in the tenant improvement phase totaling approximately 1.2 million square feet of office and PDR space. The office components of the two projects are fully leased to Adobe and Dropbox. The company's commitment and leadership position in sustainability has been recognized by various industry groups across the world. In September 2018, the company was recognized by GRESB both as North American leader across all asset classes and a global leader among all publicly traded real estate companies. Other sustainability accolades include NAREIT's Leader in the Light award for the past five years, the EPA's highest honor of Sustained Excellence and winner of Energy Star Partner of the Year for the past five years. The company is listed in the Dow Jones Sustainability World Index. At the end of the fourth quarter, the company's stabilized portfolio was 63% LEED certified and 79% of eligible properties were ENERGY STAR certified.

Current Price: $74.24
Consensus Rating: Buy
Ratings Breakdown: 6 Buy Ratings, 3 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $79.8571 (7.6% Upside)

#8 - Douglas Emmett (NYSE:DEI)

Douglas Emmett logo

Douglas Emmett (NYSE: DEI) - Like Kilroy Realty, Douglas Emmett is a Real Estate Investment Trust (REIT) that is already sensitive to rising yields caused by interest rate hikes. The stock saw a pop in the first quarter, and its year-over-year growth has exceeded its strong five-year average growth as well as the performance of the industry as a whole. However, current events are showing that the company’s growth may be slowing. Recently its shares are falling on hard times, dipping below key technical indicators. DEI dipped below its 50-day moving average and was unable to reclaim that position. More concerning in the short term, the stock is at risk of falling below its 200-day moving average. Both of these would suggest that the stock may be trying to find a floor. Either way, the stock is trading far below its February highs. The stock is considered overvalued compared to the industry both in terms of the value of assets and past earnings

About Douglas Emmett
Douglas Emmett, Inc. (DEI) is a fully integrated, self-administered and self-managed real estate investment trust (REIT), and one of the largest owners and operators of high-quality office and multifamily properties located in the premier coastal submarkets of Los Angeles and Honolulu. Douglas Emmett focuses on owning and acquiring a substantial share of top-tier office properties and premier multifamily communities in neighborhoods that possess significant supply constraints, high-end executive housing and key lifestyle amenities.

Current Price: $40.10
Consensus Rating: Buy
Ratings Breakdown: 6 Buy Ratings, 6 Hold Ratings, 0 Sell Ratings.
Consensus Price Target: $41.00 (2.2% Upside)

Companies are affected by rising interest rates because it increases their cost of borrowing from banks. Not only does this mean they may curb spending, but it also means they will pay a higher rate of interest on the money they do borrow. Slower growth can have a trickle-down effect on earnings, which can have a negative effect on stock prices.

One sector that tends to benefit from rising interest rates is the financial industry because as interest rates rise, they can charge more for lending. However, there are several other industries that show sensitivity to rising interest rates. These include energy companies that typically rely on borrowing to upgrade and maintain infrastructure, utilities who see investors flee from the security of a stable dividend for stocks with higher growth opportunity, also the real estate industry and companies that rely on real estate development for their growth such as construction and machinery can also be affected by rising interest rates.

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