In a not exactly unexpected development, the Federal Reserve last week announced that it raised its key interest rate by a quarter percentage point, which then inherently bolsters the case for stocks to buy after a rate hike. Primarily, investors shouldn’t expect much relief from policymakers. Therefore, investors must at least consider publicly traded enterprises that have a chance of performing well under rising borrowing costs.
For one thing, a Bloomberg report noted that the central bank left the door open for more rate hikes. This framework too isn’t all that surprising. While recent data suggests that inflation may be trending in the right direction (as in downward), the Fed targets a 2% inflation rate. We are well off from that key level, meaning that investors should consider rate hike-resistant stocks.
Second and on a related note, policymakers have a long-term goal of decisively curbing inflation to avoid lasting economic damage. They’re not going to be satisfied with encouraging blips here and there. Subsequently, the assumption among market participants for the Fed rate hike investment strategy should center on a hawkish tone. Simply, the central bank isn’t done tightening the money supply.
With that, below are stocks to invest in a post-rate hike.
Progressive (PGR)
For stocks to buy after a rate hike, investors should focus on businesses that people can’t live without. For that, I’ve got to go with the obvious name in Progressive (NYSE:PGR). As an insurance juggernaut – particularly for the automotive side – Progressive enjoys economic insulation. Almost every state in the Union requires drivers to carry coverage.
Bluntly speaking, for the jurisdictions that don’t, you better. Let’s just be honest – driving without insurance (especially these days) is just about the stupidest thing you can do. And while many companies compete in this sector, Progressive has a brand awareness edge. Thanks to its many years of quirky advertisements – particularly with the fictional salesperson Flo – the brand is ingrained into the collective consciousness.
Now, financially, PGR doesn’t initially seem to justify inclusion on this list of rate hike-resistant stocks. Certainly, some of the stats could use some serious shoring up. However, it enjoys decent long-term revenue growth and is consistently profitable. The pertinent nature of the business takes care of the rest.
American Water Works (AWK)
Again, when you’re talking about stocks to buy after a rate hike, you must think cynically. In my view, few ideas offer contextual cynicism than American Water Works (NYSE:AWK). By that, I don’t have anything against the water and wastewater services firm. Rather, American Water enjoys a hostage audience. No matter what happens in the economy, households must pay their core utility bills.
As well, we can be brutally honest about the narrative associated with a Fed rate hike investment strategy. You want to target indelible businesses. It doesn’t get much more indelible than AWK. Households will cut all kinds of discretionary purchases to make sure they pay their utility bills. Otherwise, if they don’t prioritize their utilities, they just wouldn’t be able to get by.
Under this context, I’m not particularly worried about AWK’s financial warts. Sure, it carries more debt than I’d like to see. It’s also overvalued against projected earnings. However, it’s consistently profitable, making it one of the stocks to invest in post-rate hikes.
Five Below (FIVE)
Frankly, I can propose several market ideas for discount retailers on this list of stocks to buy after a rate hike. However, Five Below (NASDAQ:FIVE) at this juncture makes the most sense to me. Sure, there are “true” dollar stores out there. However, the consumer economy isn’t that desperate yet. We know this because the latest jobs report still indicates a broadly tight labor market.
Once the labor market slackens and more workers than employment opportunities materialize, then we can talk about literal dollar stores. For now, Five Below presents a very attractive case because of its higher price point. Typically specializing in products priced at $5 – with some jumping to $25 – Five Below represents a bargain hunter’s arena that all consumers can enjoy, not just the desperate.
As for the financial point of view, I must admit that FIVE trades at a rich earnings premium. However, we’re also talking about a growth machine. More importantly, its trailing-year net margin stands at 8.42%, above 81.35% of cyclical retailers. It’s a strong candidate for resilient stocks after Fed moves.
IBM (IBM)
Personally, InvestorPlace readers may be tired of hearing me sing the praises of IBM (NYSE:IBM). We get it, the company used to focus on increasingly irrelevant businesses, I hear you say. Now, it shifted priorities to relevant and burgeoning sectors, such as hybrid cloud networks. What else have you got to bring to the table?
Well, I’m afraid, not much. Look, IBM may be a boring entity when it comes to tech plays. However, under the specific context of stocks to buy after a rate hike, it makes plenty of sense. From artificial intelligence to cybersecurity to even blockchain applications, IBM commands significant acumen. And I’m not even touching the entire spectrum of the firm’s utility.
Even better, IBM can help investors navigate the higher borrowing cost environment. In addition to its broad relevancies, “Big Blue” also carries a big forward yield of 4.63%. As well, it enjoys a track record of 30 years of consecutive annual dividend increases. If that wasn’t enough, IBM also trades at a forward earnings multiple of 15.13. That’s ranked lower than 75% of its peers.
CarParts.com (PRTS)
Just like its corporate name suggests, CarParts.com (NASDAQ:PRTS) is an online provider of aftermarket auto parts, including collision parts, engine parts, and performance parts and accessories. While the enterprise offers everyday relevance, here’s the thing: PRTS is terribly risky. Since the start of this year, shares tumbled nearly 21%. In the trailing one-year period, PRTS gave up 38% of its equity value.
So, why the [expletive] should investors consider PRTS as one of the stocks to buy after a rate hike? Fundamentally, CarParts.com offers a profound upside narrative. According to the AP, American consumers have been repelled by high car prices. Therefore, folks are holding onto their vehicles longer than ever.
Citing data from S&P Global Mobility, the average age of passenger vehicles on U.S. roadways hit a record 12.5 years. Personally, I’ve been keeping tabs on this stat and the figure just keeps rising. Essentially, CarParts.com enjoys a burgeoning market that may be more favorable than initially anticipated.
Thus, when an investment data aggregator pegs PRTS as significantly undervalued, I’m inclined to believe it. The hard data makes PRTS one of the stocks to invest in a post-rate hike.
United Rentals (URI)
Both sensible and risky at the same time, investors with a penchant for mild speculation may consider United Rentals (NYSE:URI). Founded in 1997, United Rentals is the largest equipment rental company in the world, per its website. Its store network pings nearly three times the size of any other provider. As well, the company features a presence in 49 states and 10 Canadian provinces.
In my opinion, it’s also one of the stocks to buy after a rate hike. Given the monetary policy environment along with a questionable economic backdrop, industry players might not want to risk purchasing equipment outright. During periods of uncertainty, some companies may find renting to be a more appropriate course of action.
Financially, URI cuts a different profile from some of the other ideas for the Fed rate hike investment strategy. Basically, United enjoys an attractive print. For example, it features a three-year revenue growth rate (per-share basis) of 10.9%, above 70.4% of its peers.
Moreover, its net margin clocks in at 17.34%, leading to consistent profitability. Lastly, URI trades at a forward earnings multiple of 11.35, which is conspicuously undervalued. Thus, it’s one of the resilient stocks after Fed moves.
HF Sinclair (DINO)
While hydrocarbon energy specialist HF Sinclair (NYSE:DINO) might not immediately seem like a relevant case for safe dividend stocks for 2023, investors would be making a mistake in ignoring it. Sure, we can talk all day about the future of mobility belonging to electric vehicles. That future is far off into the distance.
We know that immediate electrification is a pipe dream first because of infrastructure. Basically, several parts of the U.S. will require a total overhaul of the power grid. If we can’t handle air conditioners running during a hot summer day, EVs won’t make resilience issues any better.
Another point is the consumer economy. As stated earlier, inflation has caused households to hold onto their vehicles for longer. Here, we’re almost always talking about combustion-powered vehicles. Therefore, as long as consumers feel pressured, HF Sinclair should enjoy cynical relevance.
Finally, the market prices DINO at a forward multiple of 6.99. As a discount to projected earnings, the company ranks better than 63.27% of its oil and gas peers. Subsequently, it’s a wonderful idea for rate hike-resistant stocks.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.