These safe stocks can succeed in a higher interest rate environment


With the Federal Reserve expected to begin gradually raising interest rates in 2022 after a period of near-zero rates, some investors are understandably considering how to buy stocks in this changing market environment. In this segment of Backstage passregistered on January 10Fool contributors Rachel Warren and Jason Hall, along with Fool Canada analyst Jim Gillies, discuss some fantastic companies that are poised to thrive even when interest rates soar.

Jason Hall: Rachel, you have an interesting take here. I like this.

Rachel Warren: Yeah. Well, I’m a health writer. So I had to pick a healthcare stock. What I love about healthcare and investing in this space is that it’s really poised to perform well no matter what happens with interest rates or the market or the economy because that people need their medicines, people need these products and services no matter what happens in these spaces.

The stock I chose is a lesser known healthcare stock. It’s called Vertex Pharmaceuticals (NASDAQ: VRTX). This company is the leader, if not the market leader, in the therapeutic area of ​​cystic fibrosis.

He has four products that are currently approved. One of them, its lead product, Trikafta, is approved to treat, I now believe, over 90% of all people with CF. Incredible market leader there. All of its four approved drugs are the only CFTR modulators on the market.

For the non-doctors in the audience, myself included, this basically means that these drugs target the defects in the protein that cause cystic fibrosis.

The company is profitable and is experiencing strong revenue growth. Product revenue increased 29% in the last quarter year-over-year. Net profit, 28% year over year. Great company to watch. Not one that’s going to blow up your wallet overnight, but I think it can bring steady growth.

Jason Hall: When industry trends matter more than what’s happening with interest rates, that’s great. Jim, what do you have for us? Really fast.

Jim Gillies: Well, I’m going to go straight to the banks, especially the Canadian banks. We have six major banks here in Canada, five of which are listed on the New York and Toronto stock exchanges.

Bank of Nova Scotia (NYSE: SNB), Royal Bank (NYSE:RY), TD or Ameritrade above, former parent company, CIBC [Canadian Imperial Bank of Commerce (NYSE:CM)]Scotiabank [the name under which Bank of Nova Scotia operates]BMO [Bank of Montreal (NYSE:BMO)]and National Bank (TSX:NA).

The thesis is half played because I said last summer that they had been prohibited from increasing their dividends. They generally like to increase their dividends once or twice a year.

They were banned for almost two years during the pandemic and bought back shares. I said when the gloves come off or when the chains come off they will all trip over themselves increasing their dividends. This actually happened in the last quarter. I think the average increase was 14, 15%.

But that’s just a game of higher interest rates. Increases this interest margin and a rising rate environment, banks tend to do well. Canadian banks are all better valued than the major US banks in the monetary center.

Go with one of these six. If you really want to have a little fun, there’s an ETF called HCAL traded on the TSX, which are all six, except it uses both mean reversion. They tend to trade together in terms of valuation, based on the mean-reverting style of investing.

He buys the three cheapest in a much larger allocation, less than the three most expensive.

Then, as things change, they rebalance. They also employ 25% leverage because what could be more fun than leveraged banks, leverage on top of leverage. Oh, and a 5.5% dividend yield right now. Toby is for a fight.

Jason Hall: i will throw Bank of America (NYSE: BAC) on top of that. That’s terrifying, Jim, I love the idea.

But I’m going to go all the way to the big US bank, Bank of America, because they have a huge depositor base and essentially pay no return to their depositors, it’s infinitesimal. [laughs]

If they increase it, it will be miniscule, and they will get a better net interest margin on the back when they lend that money.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.


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