Following Friday’s much stronger-than-anticipated nonfarm payrolls report for July, the 10-Year Treasury yield jumped to more than 2.8% and the stock market began pricing in a higher probability that the Federal Reserve will increase interest rates by 75 basis points at its September meeting. The Fed started its most recent rate hiking cycle to try to halt rising inflation back in March with a 25-basis-point move, followed by 50-basis points in May and 75-basis points in both June and July. There had been some hope that the Fed was on a “hike and wait” pathway because the prices of so many different commodities have fallen over the past few months. In fact, the market had expected a 50-basis-ponit hike in September before the jobs numbers were released. However, we must now keep in mind that a strong labor market with robust wage gains might mean the Fed still has more work to do. One scenario we’re thinking about is what happens if the yield on the 10-Year yield crosses back over 3.0%, a level that always seems to have some psychological importance and in recent months has served to pressure stocks of high-multiple growth companies with little to no earnings, particularly in tech, that rely on lower rates to fund expansion. In this year’s turbulent market, we’ve done our best to avoid those types of stocks that are wrong for this investing and macroeconomic environment, favoring shares in companies that make things for a profit, trade at reasonable valuations to their peers, and return extra cash to shareholders in the form of dividends and buybacks. Here are five stocks we think can do well even if the 10-Year yield moves back above 3% and the labor market remains resilient. Wells Fargo (WFC) is a clear beneficiary of higher interest rates due to its large deposit base. As rates rise, Wells Fargo can make more money from the interest it charges on its loans versus what it pays on deposits. In banking, that’s called net-interest income (or loss). When Wells Fargo reported its second-quarter earnings in July , management raised its full-year net interest outlook to 20% growth from 2021 levels. That was up from a previous view of 15% growth. If job gains and wage growth remains solid, even through more rate hikes, to the point where the Fed engineers a “soft landing,” we think the current fears around loan defaults will prove to be overblown Morgan Stanley (MS) should benefit from rising rates as well, but to a lesser extent than Wells Fargo because it has less interest-rate bearing assets and credit risk. However, we like Morgan Stanley more for its return of capital to shareholders and its reasonable valuation than for the limited boost of higher rates, as we noted in our analysis of second-quarter earnings. Humana (HUM) , a health insurance company, is a stock we like because it has no sensitivity to higher rates, and it’s the type of firm that can deliver on earnings guidance through a broader economic downturn. Humana recently reported a strong second quarter , but the stock sold off on the news due to profit-taking and some disappointment that management did not flow through the entirety of the earnings beat to its full-year outlook. We thought the selloff was wrong because management is taking those extra profit dollars to reinvest in the company and support its 2023 Medicare Advantage (MA) product offering. This is the right move for the long-term health of the company because MA is one of Humana’s most lucrative businesses. Danaher (DHR) is another health-related name we like. Although the Fed may need to keep hiking rates to beat inflation and slow the economy down, Danaher’s business should remain resilient. Danaher can keep growing while economic activity around the world slows because it has exposure to strong secular growing end markets like life sciences, diagnostics, and water quality. Also, almost 75% of the company’s revenues are recurring, and the majority of those are consumables that are specified into highly regulated manufacturing processes or specific to the equipment Danaher supplies. In other words, there is no ability to substitute once you buy Danaher equipment. That’s a big reason why Danaher’s base business, excluding Covid, just delivered 8% organic revenue growt h in a quarter that was supposed to be challenged by the lockdowns in China. Constellation Brands (STZ) is another one we think can go higher because a strong labor market means people have more cash in their wallets to go out and spend on alcohol. We believe Constellation Brands, with its leading Mexican beer portfolio, is taking market share in the beer marketplace based on the recent lackluster earnings reports from competitors like Molson Coors (TAP). Or if the economy does happen to slow down, we think Constellation can still perform well because beer sales tend to be resilient in downturns, and trade down is less likely in its brands, which include Corona, Modelo and Pacifico. We also believe the steps the company is making to move past its corporate governance issues through the elimination of its voting class line is a long-term positive for shareholders. That’s despite the premium that’ll have to be paid out to the Sands family. (Jim Cramer’s Charitable Trust is long WFC, MS, HUM, DHR and STZ. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
in Business
