11 Stocks That Outperform As Interest Rates Rise

As interest rates rise, fixed-income investments start to look increasingly more attractive relative to equities, all else being equal of course. In reality, all else isn’t always equal, which means investors should think twice before trading in their stock for bonds. (To read more, see: Don’t Overreact to Higher Interest Rates: JPMorgan.)

There are plenty of stocks that perform well even amid rising rates. Two separate analyses in the past week claim they even know exactly which ones they are, according to CNBC:

  •  JPMorgan Chase & Co. (JPM)
  • Goldman Sachs Group Inc. (GS)
  • Walt Disney Company (DIS)
  • Cisco Systems Inc. (CSCO)
  • American Express Co. (AXP).

According to Bank of America Merrill Lynch as reported by Barron’s, these stocks will also perform well as interest rates climb:

  • Ingersoll-Rand PLC (IR)
  • Royal Caribbean Cruises Ltd. (RCL)
  • Lam Research Corp. (LRCX)
  • Marriott International Inc. (MAR)
  • Morgan Stanley (MS).
  • Discover Financial Services (DFS).

Price-Return Correlations

As bond yields have started to rise over the last six months, investors have begun to worry whether the equities bull market is coming to an end. Indeed, the broad market selloff at the end of January was at least partly sparked by fears of higher inflation that could accelerate the increase in rising rates. However, over those six months, JPMorgan is up almost 29%, Goldman almost 22%, CSCO at 43%, and American Express up over 16%, while Disney is the one laggard of the group, up just over 2%, as the close of trading on Tuesday.

Using its hedge-fund tool Kensho, CNBC analyzed which stocks had the highest correlation with the bond prices over the past six months. As bond yields rise when bond prices fall, a stock with a return that is negatively correlated to a bond’s price should be expected to perform well when rates rise.

Using the iShares 20+ Year Treasury Bond exchange-traded fund (TLT), CNBC found a -0.33 correlation with JPMorgan, -0.31 with Goldman, -0.19 with Disney, -0.18 with Cisco, and -0.17 with American Express. These results were published last Thursday.

Moderate Dividend Yields

Bank of America’s analysis, reported by Barron’s on Monday, uses the concept of bond duration, only applying it to stocks. Instead of coupon payments, stocks pay dividends, and the longer the duration, the longer it will take for dividend payments to compensate the investor for the initial cost of the investment. Such longer duration stocks, with their lower dividend payouts, face greater interest rate risk.

But the problem with low-duration stocks is that they are already paying big dividends and likely don’t have as much room to grow, according to the bank’s stock strategist Savita Subramanian. (To learn more: The Basics of Bond Duration.)

Subramanian suggests stocks somewhere in between, low enough dividends with lots of growth potential but not too low that they face rising interest rate risk. The six stocks that fit that bill the best, with their dividend yields, are Ingersoll-Rand with a 2% yield, Royal Caribbean at 1.8%, Lam at 1%, Marriott at 0.9%, Morgan Stanley at 1.8%, and Discover Financial at 1.8%.

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