Rising rates are a headwind for most stocks. However, for a handful, they are leading to an earnings boom,. Here are 3 stocks benefitting from higher rates: Humana (HUM), Everest RE (RE), and Silvercrest Asset Management (SAMG).
2022 has been a brutal year for the stock market. YTD, the S&P 500 is down more than 22%. And, there doesn’t seem to be a catalyst to turn things around given that the economy is slowing, and the Fed is embarking on its most aggressive hiking campaign in decades. If inflation was mild, rising credit spreads and plunging asset prices would likely cause the Fed to take notice. However, in this circumstance, this is not the case. In some respects, the Fed’s tightening is having its desired effect as financial assets are the main channel showing the efficacy of policy.
In the same way, it could be argued in 2020 that if asset prices weren’t rising, then the Fed wasn’t doing enough to support the economy. It can be argued that if markers of financial and economic stress are not increasing, then the Fed is not fully engaged in the battle against inflation. Regardless of the theory, it’s clear that until inflation starts to moderate, this policy path will continue.
Growth stocks are likely to underperform with rising rates, as are cyclical stocks due to lower economic growth. One pocket of the market that is doing well are companies that are seeing their earnings increase due to rising short-term rates. Below are 3 such stocks:
SAMG provides asset management advice to family office services in the United States. These services include providing financial advice to high- net-worth individuals and families and managing investment funds.
YTD, SAMG is up 4.5%, while the S&P 500 is down 23%. The main reason is that SAMG’s earnings and revenue are not affected as much by changes in economic or monetary conditions. If anything, these services become more valuable during these periods. Further, the company’s clients are more insulated from these factors than other segments of the population.
The other reason for SAMG’s outperformance is that short-term rates going up is a positive, since the company has a decent amount of cash and short-term investments that it manages for its clients. Thus, the company is earning more returns on this cash which flows straight to the bottom line.
Beyond this, SAMG is attractive due to its 3.8% dividend yield and very low forward P/E of 8.8. Given these positive, it’s not surprising that SAMG has an overall A rating, which translates to Strong Buy in our POWR Ratings system. A-rated stocks have posted an average annual performance of 31.1% which compares favorably to the S&P 500’s average annual gain of 8.0%. Click here to see SAMG’s complete POWR Ratings.
HUM is a health insurance company based in Louisville, Kentucky. The company had created a niche by specializing in government-sponsored programs. Almost all its medical memberships stemmed from individual and group Medicare Advantage, Medicaid, and the military’s Tricare program. The company is also a leader in stand-alone prescription drug plans for seniors enrolled in traditional fee-for-service Medicare. The firm also provides other healthcare services, including primary-care services and pharmacy benefits management.
The company’s Medicare business has it well-poised for growth for the foreseeable future. Acquisitions have been another growth driver. The purchases of Family Physicians Group, Your Home Advantage, Curo, and a share in Kindred at Home, have helped HUM strengthen its reach in the home health and hospice market.
HUM has a P/E ratio of 18.0, a P/S of 0.63, and a P/cash of 11. These are quite impressive given that its poised to outperform in this difficult environment. Further, its strong balance sheet and large cash holding will insulate investors against a downturn in the economy or increase in rates.
The company is rated an A which equates to a Strong Buy by the POWR Ratings. In terms of component grades, HUN has a B for Quality due to its strong financial position and stable revenues. It’s in the A-rated Medical – Health Insurers group which is ranked #16 out of 124 sectors. Click here to see HUM’s complete POWR Ratings.
RE is an underwriter of reinsurance and insurance in the United States, Bermuda, and international markets with the bulk of operations in the US. The company is split in 4 segments: U.S. Reinsurance; International; Bermuda; and Insurance segments. Its products include a range of property and casualty reinsurance and insurance coverages.
Insurance stocks are also a good option during volatile market conditions. For one, their businesses are much steadier as insurance demand doesn’t really change that much. Further, these companies have large cash holdings that they invest in short-term securities, thus they benefit from rising rates.
Thus, it’s not surprising that RE is an outperformer with a 2% decline YTD which is significantly better than the S&P 500’s YTD 23% drop. Additionally, Wall Street analysts are forecasting 21.1% earnings growth and 19.6% revenue growth.
This growth is particularly impressive given its very low forward P/E of 6.5. The company also pays a 2.5% dividend and has a history of constant increases. Given these bullish fundamentals, it’s not surprising that the stock has an overall B rating, which equates to a Buy in our proprietary rating system. B-rated stocks have posted an average annual performance of 21.1% which compares favorably to the S&P 500’s average annual gain of 8.0%. Click here to see more of RE’s POWR Ratings.
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HUM shares were trading at $449.98 per share on Wednesday afternoon, up $1.00 (+0.22%). Year-to-date, HUM has declined -2.82%, versus a -20.51% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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