The stock market is stimulated like a child with a sugar high on Halloween night, and investors are enjoying the ride. It seems like nearly every sector continues to point in one direction. But seasoned investors know that the markets don’t move in the same direction all the time. And even long-term bulls admit that a correction may be coming.
One reason for this is that the Federal Reserve (i.e. “The Fed”) is “talking about, talking about” an end to its asset purchase program. If that talk turns into concrete action, then it would be almost a sure sign that interest rates will rise sooner than expected.
That combination is typically negative for equities, such as stocks. Yet, even if the Fed announces an earlier-than-expected tapering plan, there are stocks that will hold up well and even thrive. And that’s the focus of this presentation. We’re taking a looks at seven stocks that stand to benefit from a less accommodative monetary policy.
Financial stocks are one group of stocks that will benefit from rising interest rates. And you should also consider stocks with a high return on equity (ROE).
ROE = Net Income/Shareholders’ Equity
Stocks with a high ROE are reinvesting cash at a high rate of return which can make them an ideal choice when that cash becomes more valuable.
Quick Links
- KLA Corporation
- Lockheed Martin
- Best Buy
- Apple
- Virtu Financial
- Coinbase
- JPMorgan Chase
#1 - KLA Corporation (NASDAQ:KLAC)
The first stock on our list is KLA Corporation (NASDAQ: KLAC). This is a stock that certainly checks the box on Return on Equity. In its last quarter, KLA recorded an ROE of 68.1%. The company manufactures and services the equipment that makes microchip wafers. That means the company is going to be essential to resolving the global chip shortage which is affecting many sectors in the short term.
KLA Corporation delivered a strong earnings report in July. In addition to beating on the top and bottom lines, KLA announced a 16% increase in its dividend. That makes it 11 years of consecutive dividend growth and a three-year dividend payout ratio of 54.87%. Some may turn up their nose at the company’s dividend yield that is only 1.28% as of this writing. However, KLA announced a $2 billion share buyback program.
Analysts love KLAC stock. Since the company delivered its earnings report the stock has received one upgrade and six increases in its price target.
About KLA
KLA Corporation, together with its subsidiaries, engages in the design, manufacture, and marketing of process control, process-enabling, and yield management solutions for the semiconductor and related electronics industries worldwide. It operates through three segments: Semiconductor Process Control; Specialty Semiconductor Process; and PCB and Component Inspection.
Read More - Current Price
- $616.83
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 14 Buy Ratings, 8 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $802.90 (30.2% Upside)
#2 - Lockheed Martin (NYSE:LMT)
Like KLA Corp, Lockheed Martin (NYSE: LMT) checks the boxes on a couple of different fronts. First, it delivers a high return on equity of over 123%. Second, it is one of the leading stocks in the defense sector. And with events unfolding as they are in Afghanistan, defense stocks are likely to perform very well. That is likely to serve as a buffer for the stock in the event that the Fed would begin to taper its asset-buying program.
LMT stock is up 24% since the beginning of the pandemic in March 2020. However, it’s been a choppy ride. The stock is down 8% since early June, but is flat in the 30 days ending August 26.
Analysts currently list the stock as a Hold and give the stock a 10% upside, but it’s clear that the analyst community has not yet considered how the recent geopolitical instability may affect LMT stock.
About Lockheed Martin
Lockheed Martin Corporation, a security and aerospace company, engages in the research, design, development, manufacture, integration, and sustainment of technology systems, products, and services worldwide. The company operates through Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space segments.
Read More - Current Price
- $534.89
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 9 Buy Ratings, 4 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $611.00 (14.2% Upside)
#3 - Best Buy (NYSE:BBY)
Best Buy (NYSE: BBY) is another of the “cash cows” you can consider to offset a tapering announcement from the Federal Reserve. The company’s ROE as of May 21, 2021 is a healthy 53.8%. But Best Buy has a strong story to back up its balance sheet.
Best Buy was a strong, if not surprising, pandemic winner as many Americans needed to upgrade their technology to fit their work-from-home lifestyle. This demonstrated to investors that Best Buy was successfully executing its digital and omnichannel strategy. And although 2021 is shaping up to be slightly weaker, the company raised its outlook for comparable sales to decline in the range of 0% to 3% from previous guidance that called for a full-year decline in the high single-digits.
But the good news for investors is that this is not fully baked into the BBY stock price which is only up 18% for the year. And analysts suggest that the stock has another 8% to go with 75% of analysts saying that the stock is set to outperform.
About Best Buy
Best Buy Co, Inc engages in the retail of technology products in the United States, Canada, and international. Its stores provide computing and mobile phone products, such as desktops, notebooks, and peripherals; mobile phones comprising related mobile network carrier commissions; networking products; tablets covering e-readers; smartwatches; and consumer electronics consisting of digital imaging, health and fitness products, portable audio comprising headphones and portable speakers, and smart home products, as well as home theaters, which includes home theater accessories, soundbars, and televisions.
Read More - Current Price
- $86.77
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 10 Buy Ratings, 7 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $103.35 (19.1% Upside)
#4 - Apple (NASDAQ:AAPL)
Although technology stocks in general stand to underperform if the Fed begins to taper, that’s not true in all cases. If you use ROE as a metric then you have to at least consider Apple (NASDAQ: AAPL) which has an ROE of 131%.
Apple delivered a surprisingly strong earnings report that further proves that the company is much more than the company that makes the iPhone. The last several years have proven to investors that the company is garnering significant revenue from its Services and Wearables business units.
However, it also doesn’t hurt that the company was able to launch the iPhone 12 in 2020. And, despite supply chain difficulties, the company is planning to launch the iPhone 13 in 2021.
Apple has also been one of the most upgraded stocks by analysts in the month of August. Analysts have much more access to company insiders. And with the Fed tapering being a known risk, the fact that analysts remain bullish is a strong catalyst for the stock.
About Apple
Apple Inc designs, manufactures, and markets smartphones, personal computers, tablets, wearables, and accessories worldwide. The company offers iPhone, a line of smartphones; Mac, a line of personal computers; iPad, a line of multi-purpose tablets; and wearables, home, and accessories comprising AirPods, Apple TV, Apple Watch, Beats products, and HomePod.
Read More - Current Price
- $229.00
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 23 Buy Ratings, 11 Hold Ratings, 2 Sell Ratings.
- Consensus Price Target
- $235.25 (2.7% Upside)
#5 - Virtu Financial (NASDAQ:VIRT)
Virtu Financial (NASDAQ: VIRT) is a way to invest in the market’s need for liquidity during what could be turbulent times. Virtu Financial is one of the leading financial services firms. The company uses cutting-edge technology to provide market-making and execution services. This isn’t the most exciting stock, but it’s a company that will be needed in the event of market volatility.
Virtu operates as a market maker by providing “deep liquidity and competitive bids and offers in over 25,000 securities, at over 235 venues, and execution technology to our clients while creating more efficient and stable markets worldwide.”
The company is not heavily covered by the analyst community. However, of the four analysts that cover VIRT stock, they give the stock a consensus price target that shows the stock may have a 21% upside in the next 12 months. The stock has been flat in the last month after an earnings report in which the company beat on revenue but missed on the bottom line.
About Virtu Financial
Virtu Financial, Inc operates as a financial services company in the United States, Asia Pacific, Canada, EMEA, Ireland, and internationally. The company operates through two segments, Market Making and Execution Services. Its product includes offerings in execution, liquidity sourcing, analytics and broker-neutral, capital markets, and multi-dealer platforms in workflow technology.
Read More - Current Price
- $36.99
- Consensus Rating
- Hold
- Ratings Breakdown
- 3 Buy Ratings, 4 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $29.50 (20.2% Downside)
#6 - Coinbase (NASDAQ:COIN)
If you’re a contrarian investor, you may want to consider investing in Coinbase (NASDAQ: COIN). There is one camp that believes the end of the Fed’s $120 billion monthly asset purchases would be bearish for cryptocurrencies. This is because cryptocurrencies, such as Bitcoin (CCC: BTC-USD), rely on their reputation as a risk-on asset for the dollar.
However, there is also a sentiment that there are many cryptocurrencies that would be unaffected by the Fed tapering because of strong investor sentiment towards the underlying blockchain technology.
Still, cryptocurrencies are still a young, emerging market. And investors don’t really know what will happen to digital currencies with a less accommodative monetary policy. But it also seems like an asset class that shouldn’t be ignored. A way for investors to get exposure to a full basket of cryptocurrencies is by investing in Coinbase which is the first exchange platform for cryptocurrencies. Since its public debut in April 2021, COIN stock is down 24%. However, the consensus opinion of analysts is that the stock has an upside of nearly 45%.
About Coinbase Global
Coinbase Global, Inc provides financial infrastructure and technology for the crypto economy in the United States and internationally. The company offers the primary financial account in the crypto economy for consumers; and a marketplace with a pool of liquidity for transacting in crypto assets for institutions.
Read More - Current Price
- $320.01
- Consensus Rating
- Hold
- Ratings Breakdown
- 10 Buy Ratings, 9 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $251.00 (21.6% Downside)
#7 - JPMorgan Chase (NYSE:JPM)
The last stock on this list is arguably the best of the bank stocks, that being JPMorgan Chase (NYSE: JPM). Financial stocks are likely to perform well in the event of a tapering event. That’s because once the tapering starts, interest rate hikes are the next likely step.
Higher interest rates could potentially slow down the pace of the company’s consumer and commercial lending. However, the pace of increases will be measured. In the meantime, the bank will benefit from being able to charge slightly more interest on its lending without paying out too much more to depositors.
And by investing in JPM stock, investors also get access to the company’s fortress balance sheet that was recently strengthened when the bank added $3 billion that is was setting aside in loan-loss reserves.
JPM stock is up 63% in the last 12 months and 28.5% in 2021 which outpaces the growth in the S&P 500 Index.
About JPMorgan Chase & Co.
JPMorgan Chase & Co operates as a financial services company worldwide. It operates through four segments: Consumer & Community Banking (CCB), Corporate & Investment Bank (CIB), Commercial Banking (CB), and Asset & Wealth Management (AWM). The CCB segment offers deposit, investment and lending products, cash management, and payments and services; mortgage origination and servicing activities; residential mortgages and home equity loans; and credit cards, auto loans, leases, and travel services to consumers and small businesses through bank branches, ATMs, and digital and telephone banking.
Read More - Current Price
- $240.78
- Consensus Rating
- Hold
- Ratings Breakdown
- 10 Buy Ratings, 7 Hold Ratings, 2 Sell Ratings.
- Consensus Price Target
- $229.31 (4.8% Downside)
The Fed’s annual meeting in Jackson Hole, Wyoming may provide some clues about when the Fed may begin to taper its asset purchases. Or not. The Delta variant is creating new concerns about the pace of the economic recovery. And that may be just the reason the Fed needs to take a more “measured” approach.
But even without the Delta variant, it’s entirely likely, and even probable, that nothing substantial will occur. But it’s best to be prepared because tapering is more a question of when and not if. The last significant tapering event occurred in 2013. At that time, investors rotated out of growth and cyclical stocks. Defensive stocks performed the best.
And although this presentation focused on individual equities, now could be a good time to consider investing in high-quality exchange-traded funds (ETFs). This would give you exposure to some areas like technology without having to rely on the performance of any one stock.
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