As interest rates rise, banks and securities brokerage firms widen their interest rate spreads and profit margins. Outside the financial sector, large cash balances and small debt loads will be the recipe for outperformance, according to Savita Subramanian, U.S. equities and quantitative strategist at Bank of America Merrill Lynch. As she told Barron’s, looking back at recent decades when interest rates trended downwards: “Anything with leverage outperformed cash-rich securities. It’s been a one-way street.” No longer. “Leverage had been great and now is becoming evil,” she added.
Based on the above observations, Subramanian recommended 10 stocks to Barron’s. These are: semiconductor manufacturer Micron Technology Inc. (MU); employment staffing and consulting firm Robert Half International Inc. (RHI); discount brokerage firm Charles Schwab Corp. (SCHW); NYSE parent Intercontinental Exchange Inc. (ICE); and banking companies Zions Bancorporation (ZION), Huntington Bancshares Inc. (HBAN), JPMorgan Chase & Co. (JPM), BB&T Corp. (BBT), Regions Financial Corp. (RF), and Capital One Financial (COF).
- Micron: +27.0%, -14.6%, 5.3x
- Robert Half: +6.0%, -3.2%, 16.4x
- Schwab: -0.4%, -11.6%, 18.0x
- Intercontinental Exchange: +3.1%, -4.0%, 18.3x
- Zions: +4.4%, -7.3%, 13.0x
- Huntington: +1.4%, -10.6%, 11.1x
- JPMorgan Chase: +4.2%, -6.7%, 11.3x
- BB&T: +5.2%, -7.3%, 12.2x
- Regions: +7.6%, -8.0%, 12.3x
- Capital One: -2.8%, -8.4%, 9.0x
According to Barron’s, Subramanian and her team use enterprise value (EV) in addition to market capitalization in their analyses. “We are trying to figure out how much of a factor’s returns or the performance of a sector or theme came from the ability to get cheap capital,” she added. She also has singled out financial stocks in general as likely to outperform at this late stage of the bull market. (For more, see also: Buy Tech, Financial Stocks for Late Bull Market: BofA.)
The BofA Merrill Lynch team also identified 10 stocks that they believe will incur substantial damage from rising interest rates. These are, per Barron’s: gold and copper producer Newmont Mining Corp. (NEM); data storage device maker Western Digital Corp. (WDC); oil and gas exploration company Concho Resources Inc. (CXO); medical device maker Cooper Companies Inc. (COO); insurer The Hartford Financial Services Group Inc. (HIG); oilfield services company National Oilwell Varco Inc. (NOV); electric and gas utility Public Service Enterprise Group Inc. (PEG); and real estate companies Prologis Inc. (PLD), Regency Centers Corp. (REG), and Ventas Inc. (VTR).
While considered vulnerable by BofA Merrill Lynch, Concho Resources and Public Service Enterprise Group recently were recommended by Goldman Sachs Group Inc. for their high revenue growth relative to the S&P 500 Index (SPX) as a whole. Companies with this attribute, Goldman believes, are likely to outperform the market. Schwab and CBOE also appear in Goldman’s high revenue growth basket. (For more, see also: 9 Stocks Fueled By High-Octane Sales Growth.)