The latest Consumer Price Index (CPI) reading indicates that inflation may be peaking. But if you go to the grocery store or pay rent you're aware that prices aren't going down anytime soon. In fact, there's growing sentiment that inflation will be sticky.
What does that mean for interest rates? One part of the Federal Reserve's dual mandate is to keep inflation at or near its 2% target level. That means that it's reasonable to suggest that the Fed is not done with rate hikes.
Rising interest rates generally spell trouble for equity investors. Businesses, like consumers, are affected by higher interest rates. Not to be overly simplistic, but hiring borrowing costs means lower earnings. And that means a lower stock price.
However, some stocks manage rising interest rates better than others. In this special presentation, we look at seven stocks that are built to outperform when interest rates are rising. And what's even better, many of these stocks have business models that provide growth when the economy is firing on all cylinders.
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- ExxonMobil
- Procter & Gamble
- PepsiCo
- Global Water Resources
- Newmont Mining
- Cigna
- Bristol-Myers Squibb
#1 - ExxonMobil (NYSE:XOM)
The first stock on this list is ExxonMobil (NYSE:XOM). Investing in oil and gas stocks is fundamentally about supply and demand. So when demand for oil rises, supplies shrink, and oil prices rise. In fact, crude oil prices are one of the primary drivers of inflation. And a rising oil price is one of the hardest to avoid. Even when gas and diesel prices are high, people still need to get from point A to point B.
However, like many traditional fossil fuel companies, ExxonMobil continues to make strategic investments in renewable energy. And with the expectation for more government and private sector money likely to flow into climate technology, ExxonMobil is likely to be a beneficiary.
That would also be bullish for investors in XOM stock. In the five years ending in August 2022, XOM stock has increased by approximately 16%. But the bulk of the rise in share price occurred since 2021. However, even when the stock’s performance has been lackluster those investors have been rewarded with a generous dividend that the company has increased for the last 38 consecutive years.
About Exxon Mobil
Exxon Mobil Corporation engages in the exploration and production of crude oil and natural gas in the United States and internationally. It operates through Upstream, Energy Products, Chemical Products, and Specialty Products segments. The Upstream segment explores for and produces crude oil and natural gas.
Read More - Current Price
- $105.87
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 11 Buy Ratings, 8 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $128.74 (21.6% Upside)
#2 - Procter & Gamble (NYSE:PG)
Procter & Gamble (NYSE:PG) is the home to some of the world’s most iconic brands, such as Tide, Bounty, and Luvs. The company has rewarded investors with stock price growth of 60% in the last five years. And that goes along with a dividend that has been growing for the last 66 years and pays out $3.65 on an annual basis as of this writing.
The company is set up well to maintain revenue and earnings growth in the face of rising interest rates. For starters, the company has a solid balance sheet with rising free cash flow (FCF). And the company has pricing power that can help maintain its brand loyalty even in the face of competition from private label brands.
Currently, analysts rate PG stock as a Moderate Buy with an 11% upside. That’s understandable for a stock that is trading at a P/E ratio of 25x earnings. However, the stock is still considered to be in-line with the sector’s valuation.
About Procter & Gamble
The Procter & Gamble Company engages in the provision of branded consumer packaged goods worldwide. The company operates through five segments: Beauty; Grooming; Health Care; Fabric & Home Care; and Baby, Feminine & Family Care. The Beauty segment offers conditioners, shampoos, styling aids, and treatments under the Head & Shoulders, Herbal Essences, Pantene, and Rejoice brands; and antiperspirants and deodorants, personal cleansing, and skin care products under the Olay, Old Spice, Safeguard, Secret, SK-II, and Native brands.
Read More - Current Price
- $168.06
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 16 Buy Ratings, 7 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $180.45 (7.4% Upside)
#3 - PepsiCo (NASDAQ:PEP)
Pricing power and recognizable brands are also reasons for investors to consider PepsiCo (NASDAQ:PEP). The company operates in the consumer discretionary sector, but it may as well be considered a consumer staples company. The company’s products have many of the attributes of defensive stocks, including steady demand and the ability to command premium shelf space.
Although the company is known for its iconic soft drinks, the company has also successfully pivoted into snack foods with its acquisition of Frito-Lay. This gives the company two avenues to attract customers. PepsiCo is also branching out into healthier alternatives for both its beverage and snack food products.
PEP stock is up 51% in the last five years. And buy-and-hold investors have seen their total return climb even higher because of the company’s dividend. PepsiCo is a dividend king, having increased its dividend every year for the past 51 years. With a diversified product line that still commands market share, PEP stock looks like a solid buy with interest rates on the rise.
About PepsiCo
PepsiCo, Inc engages in the manufacture, marketing, distribution, and sale of various beverages and convenient foods worldwide. The company operates through seven segments: Frito-Lay North America; Quaker Foods North America; PepsiCo Beverages North America; Latin America; Europe; Africa, Middle East and South Asia; and Asia Pacific, Australia and New Zealand and China Region.
Read More - Current Price
- $152.79
- Consensus Rating
- Hold
- Ratings Breakdown
- 6 Buy Ratings, 9 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $184.31 (20.6% Upside)
#4 - Global Water Resources (NASDAQ:GWRS)
Global Water Resources (NASDAQ:GWRS) is a waste resource management company based in Phoenix, Arizona. The company owns, operates, and manages regulated water, wastewater, and recycled water utilities. As of December 2020 the company services approximately 74,000 customers.
Utility stocks fall out of favor with investors during bull markets. But when the economy slows down, and interest rates are rising, the predictable revenue of these companies becomes attractive to investors.
Water stocks, in particular, are drawing attention as the world is beginning to come to grips with the need to update our infrastructure as well as an increasing need for effective water treatment. The latter makes a sound buying case for GWRS stock.
Global Water Resources is a small-cap stock that has only been trading publicly since 2016. However, GWRS stock is up 56% in the last five years. Analysts tracked by MarketBeat give the stock a 42% upside, and the company has increased its dividend for the last four years and currently has a dividend yield of approximately 2%.
About Global Water Resources
Global Water Resources, Inc, a water resource management company, owns, operates, and manages regulated water, wastewater, and recycled water systems primarily in metropolitan Phoenix and Tucson, Arizona. It serves approximately 82,000 people in approximately 32,000 homes. The company was founded in 2003 and is based in Phoenix, Arizona.
- Current Price
- $11.69
- Consensus Rating
- N/A
- Ratings Breakdown
- 0 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
#5 - Newmont Mining (NYSE:NEM)
Newmont Mining (NYSE:NEM) is up 25% in the last five years. That’s understandable because the Federal Reserve was expanding its balance sheet. And a lingering effect of inflating the money supply is currency devaluation.
However, rising interest rates generally make the dollar stronger. So is there a case to be made for NEM stock? There are reasons to believe it very well could be.
One reason for this bullish take is that inflation tends to be sticky. And when investors are concerned about the value of their nation’s currency, they frequently turn to precious metals. However, taking possession of physical metals has its drawbacks. That’s why many investors looking for exposure to precious metals choose mining stocks. And Newmont Mining remains one of the best in class for investors.
Newmont is the largest miner in the world, with a market cap of over $36 billion. In addition to having projects on four continents, the company reports it will have sustainable annual gold production of approximately 8 million gold equivalent ounces (GEOs) for the next 10 years.
About Newmont
Newmont Corporation engages in the production and exploration of gold. It also explores for copper, silver, zinc, and lead. The company has operations and/or assets in the United States, Canada, Mexico, Dominican Republic, Peru, Suriname, Argentina, Chile, Australia, Papua New Guinea, Ecuador, Fiji, and Ghana.
Read More - Current Price
- $38.28
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 9 Buy Ratings, 7 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $54.31 (41.9% Upside)
#6 - Cigna (NYSE:CI)
Higher interest rates make consumers conscious of every dollar they spend. But insurance, particularly health insurance, is something that consumers can’t cut from their budget. That’s one reason to look at Cigna (NYSE:CI).
Cigna is a multinational provider of managed healthcare and other insurance solutions. CI stock is up 64% in the last five years. But until 2021, that growth came with a lot of steep drops in the stock price. As of August 2022, the stock is trading near its all-time high. And analysts believe that increased worldwide demand for healthcare insurance will be the driver of continued earnings growth.
Plus, the company pays a dividend that currently sports a 26% payout ratio. That, along with rising earnings, suggests Cigna will be able to grow its dividend in the coming years. And that can help investors outrun the effects of rising interest rates.
About The Cigna Group
The Cigna Group, together with its subsidiaries, provides insurance and related products and services in the United States. Its Evernorth Health Services segment provides a range of coordinated and point solution health services, including pharmacy benefits, home delivery pharmacy, specialty pharmacy, distribution, and care delivery and management solutions to health plans, employers, government organizations, and health care providers.
Read More - Current Price
- $276.92
- Consensus Rating
- Buy
- Ratings Breakdown
- 14 Buy Ratings, 1 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $394.64 (42.5% Upside)
#7 - Bristol-Myers Squibb (NYSE:BMY)
The last stock that will manage through rising interest rates is Bristol-Myers Squibb (NYSE:BMY). If Cigna proves that consumers will need health insurance, Bristol-Myers Squibb is evidence that they will need prescription drugs.
With a market cap that is currently over $1.59 billion, Bristol-Myers Squibb is one of the largest pharmaceutical companies in the world. In 2021, the company delivered just over $46 billion in revenue. And the company is on track to best that mark in 2022.
If you want supporting evidence for that, you need to look no further than the company’s product line. In 2021, the company had three drugs that achieved more than $5 billion in total sales. And the company has a strong pipeline that should allow the company to replace drugs that have lost their patent protection.
About Bristol-Myers Squibb
Bristol-Myers Squibb Company discovers, develops, licenses, manufactures, markets, distributes, and sells biopharmaceutical products worldwide. It offers products for hematology, oncology, cardiovascular, immunology, fibrotic, and neuroscience diseases. The company's products include Eliquis for reduction in risk of stroke/systemic embolism in non-valvular atrial fibrillation, and for the treatment of DVT/PE; Opdivo for various anti-cancer indications, including bladder, blood, CRC, head and neck, RCC, HCC, lung, melanoma, MPM, stomach and esophageal cancer; Pomalyst/Imnovid for multiple myeloma; Orencia for active rheumatoid arthritis and psoriatic arthritis; and Sprycel for the treatment of Philadelphia chromosome-positive chronic myeloid leukemia.
Read More - Current Price
- $57.33
- Consensus Rating
- Hold
- Ratings Breakdown
- 5 Buy Ratings, 13 Hold Ratings, 2 Sell Ratings.
- Consensus Price Target
- $55.64 (2.9% Downside)
Investors are like consumers. And like the purchases they make at the grocery store or gas station, consumers have little control over interest rates. The same is true of investors. But there's money to be made in the market no matter how aggressive or dovish the Fed gets.
However, the point of this presentation is to help you find stocks that are likely to be strong performers even if interest rates continue to rise. These stocks fit that description for the reasons provided. And if there's a theme for all of the stocks on this list is that they are evergreen stocks. But that only amplifies the fact that these are stocks for you to consider in a rising interest rate environment.
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