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.
Quick Links
- Caterpillar Inc.
- Hewlett-Packard Enterprise Company
- NetApp, Inc.
- American Water Works Company
- Parsley Energy
- Antero Resources
- Kilroy Realty
- Douglas Emmett
#1 - Caterpillar Inc. (NYSE:CAT)
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, off-highway diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives in worldwide. Its Construction Industries segment offers asphalt pavers, compactors, road reclaimers, forestry machines, cold planers, material handlers, track-type tractors, excavators, telehandlers, motor graders, and pipelayers; compact track, wheel, track-type, backhoe, and skid steer loaders; and related parts and tools.
Read More - Current Price
- $366.04
- Consensus Rating
- Hold
- Ratings Breakdown
- 7 Buy Ratings, 6 Hold Ratings, 4 Sell Ratings.
- Consensus Price Target
- $384.33 (5.0% Upside)
#2 - Hewlett-Packard Enterprise Company (NYSE:HPE)
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 provides solutions that allow customers to capture, analyze, and act upon data seamlessly in the Americas, Europe, the Middle East, Africa, the Asia Pacific, and Japan. It operates in six segments: Compute, HPC & AI, Storage, Intelligent Edge, Financial Services, and Corporate Investments and Other.
Read More - Current Price
- $21.61
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 8 Buy Ratings, 6 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $24.00 (11.1% Upside)
#3 - NetApp, Inc. (NASDAQ:NTAP)
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 cloud-led and data-centric services to manage and share data on-premises, and private and public clouds worldwide. It operates in two segments, Hybrid Cloud and Public Could. The company offers intelligent data management software, such as NetApp ONTAP, NetApp Snapshot, NetApp SnapCenter Backup Management, NetApp SnapMirror Data Replication, NetApp SnapLock Data Compliance, and storage infrastructure solutions, including NetApp All-Flash FAS series, NetApp Fabric Attached Storage, NetApp E/EF series, and NetApp StorageGRID.
Read More - Current Price
- $118.45
- Consensus Rating
- Hold
- Ratings Breakdown
- 6 Buy Ratings, 10 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $139.20 (17.5% Upside)
#4 - American Water Works Company (NYSE:AWK)
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. It offers water and wastewater services to approximately 1,700 communities in 14 states serving approximately 3.5 million active customers. The company serves residential customers; commercial customers, including food and beverage providers, commercial property developers and proprietors, and energy suppliers; fire service and private fire customers; industrial customers, such as large-scale manufacturers, mining, and production operations; public authorities comprising government buildings and other public sector facilities, such as schools and universities; and other utilities and community water and wastewater systems.
Read More - Current Price
- $125.92
- Consensus Rating
- Reduce
- Ratings Breakdown
- 2 Buy Ratings, 3 Hold Ratings, 3 Sell Ratings.
- Consensus Price Target
- $142.29 (13.0% Upside)
#5 - Parsley Energy (NYSE:PE)
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, exploration, production, and sale of crude oil and natural gas properties in the Permian Basin in west Texas and Southeastern New Mexico. As of December 31, 2019, its acreage position consisted of 191,179 net acres, including 149,615 net acres in the Midland Basin and 41,564 net acres in the Delaware Basin; and operated 558.9 net acres of the horizontal wells and 723.1 net acres of the vertical wells, as well an estimated proved oil, natural gas, and natural gas liquid reserves of 592.3 MMBoe.
Read More - Current Price
- $16.93
- Consensus Rating
- N/A
- Ratings Breakdown
- 0 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
#6 - Antero Resources (NYSE:AR)
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, engages in the development, production, exploration, and acquisition of natural gas, natural gas liquids (NGLs), and oil properties in the United States. It operates in three segments: Exploration and Development; Marketing; and Equity Method Investment in Antero Midstream.
Read More - Current Price
- $30.93
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 11 Buy Ratings, 8 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $34.78 (12.4% Upside)
#7 - Kilroy Realty (NYSE:KRC)
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 (NYSE: KRC, the company, Kilroy) is a leading U.S. landlord and developer, with operations in San Diego, Greater Los Angeles, the San Francisco Bay Area, Greater Seattle and Austin. The company has earned global recognition for sustainability, building operations, innovation and design.
Read More - Current Price
- $40.50
- Consensus Rating
- Hold
- Ratings Breakdown
- 3 Buy Ratings, 4 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $40.63 (0.3% Upside)
#8 - Douglas Emmett (NYSE:DEI)
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
- $18.08
- Consensus Rating
- Hold
- Ratings Breakdown
- 2 Buy Ratings, 5 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $17.43 (3.6% Downside)
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.
More Investing Slideshows:
