Yahoo Finance The 5 stocks to buy with rising rates: Portfolio manager
As the Federal Reserve gears up to eventually raise interest rates, one portfolio manager says the days of momentum stocks will give way to larger, more established names.
Since the second half of 2012, the S&P 500 (^GSPC) is up more that 50%, boosted in part by the Fed’s quantitative easing policy and low short-term interest rates. The fed funds rate has been close to 0% since for over half a decade.
According to Chad Morganlander, portfolio manager at Stifel Nicolaus’ Washington Crossing Advisors, this has been a boon to stocks with high volatility. He calculates returns of 82% over the past 3 years for S&P 500 stocks with high volatility while those with lower volatility have only seen 33%.
But with the Fed now expected to raise rates within the next several months, Morganlander says investors should take on stocks that have moved more “slow and steady” compared to highflying stocks.
“Investors should start moving up the quality spectrum,” he said. “They will take leadership position over the high-momentum, high-beta stocks.”
Morganlander is looking at five stocks in particular: Walmart, Pepsico, Anheuser-Busch InBev, Hershey, and Abbott Labs.
Chad Morganlander’s picks for rising rates | ||||||
Company | Market cap | Price (6/25/15) | Est. 1-year target* | Last 12 months return | P/E (ttm) | Dividend yield |
Walmart (WMT) | $231.4B | $72.38 | $80.50 | -4.6% | 14.4x | 2.7% |
Anheuser-Busch InBev (BUD) | $201.7B | $126.09 | $135.72 | 9.3% | 19.9x | 3.7% |
Pepsico (PEP) | $140.0B | $95.29 | $106.15 | 6.8% | 22.1x | 3.0% |
Hershey (HSY) | $19.3B | $88.24 | $96.25 | -9.4% | 23.4x | 2.4% |
Abbott Labs (ABT) | $73.4B | $49.50 | $51.41 | 21.7% | 17.9x | 1.9% |
*Data from Thompson Financial
“What you are looking for are companies that are consistently growing, consistently profitable, well-capitalized, as well as [with] an ever-increasing dividend yield,” he said.
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While Morganlander is looking for growing dividends, he cautions against buying stocks that are already paying high yields.
“You have to be very careful because high dividend-paying stocks will have a bond-like type of fluctuation or what we call ‘duration risk’,” he warns.
Sectors with consistent dividends – most notably, utilities – are treated like bonds and tend to do well in low-rate environments. That’s because yields move in the opposite direction of price. But when rates rise, prices fall.
“We’re just looking for companies that have consistency – consumer staple companies,” Morganlander said. “We do not want to be in high-dividend paying stocks when the Federal Reserve starts raising interest rates.”
Disclosures: Stifel makes a market and/or has relationships with WMT, BUD, PEP, HSY, ABT. Neither Morganlander nor his family hold those stocks in their personal portfolios.
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