The Federal Reserve continues to hold an aggressive position on sticky inflation. The central bank recently approved a much-anticipated interest rate hike of 25 basis points, pushing their benchmark borrowing cost to the highest level in more than 22 years.
During its most recent meeting in July, Federal Open Market Committee (FOMC) Chair Jerome Powell announced that the Federal Reserve will continue its monetary tightening, raising the rate to a target range of 5.25% – 5.5%.
The last time rates were this high was when George Bush was still president.
However, the central is not yet finished with its aggressive monetary policy, and there is currently a 20% to 30% chance of yet another 25 basis point rate hike in its upcoming meeting in September according to a federal watchdog, CME Group.
The last remaining meeting for the year could perhaps be the tipping point for the central bank, and would – hopefully – conclude the bank’s policy on bringing inflation down to its 2% target range.
The consecutive interest rate hikes have been an uphill, at best, for many consumers and businesses. Higher rates, resulting in ballooning mortgage payments and higher borrowing costs have made it hard on nearly everyone, yet despite the turbulent conditions, several stocks have gained from the inflating interest rate era.
While the bank will continue to hold rates at their current position until they have a more promising outlook that inflation is coming down, investors looking for buoyant opportunities in the high rates era can look towards some of the following stock picks.
Marathon Petroleum
Marathon Petroleum (NYSE: MPC) recently snapped a seven-day winning streak, shedding 0.59% against the S&P Index which tumbled 0.64% on July 27, however, the company still managed to outperform the market in single-day trading.
Share prices are steadily approaching their earlier peak of $135.64 per share recorded in April, with MPC up by 12% in July, and share prices hovering around the $129.58 mark.
The long-term outlook for MPC in a high-interest rate environment is that the company and more importantly, share prices will continue to see positive returns, with Marathon having relative performance sensitivity to 10-year U.S. Treasury yields.
While the broader oil and gas refining market continues to experience economic headwinds, investors need to rather focus their attention on stocks that can provide them with reliability and companies that can see improving cash returns. Bank of America has a “Buy” rating on MPC, with a target range price of $165 per share.
Kohl’s Corporation
Department store operator Kohl’s (NYSE: KSS) has had a busy first quarter, with the company issuing a branded retail store credit card, which will allow consumers to use their cards in any of their Kohl’s locations and their online store.
The company could potentially benefit from a higher interest rate environment, with Kohl’s expected to generate income through its store credit cards. This would mean that the annual percentage rate (APR) on store credit cards would rise alongside the increasing benchmark interest rate.
This year has already proven significantly positive for the retailer, with KSS up 12% year-to-date (YTD), and analysts continue to hold a bullish position on the company’s stocks. During July, share prices jumped by more than 21%, and currently, KSS has a 7.26% dividend yield.
Costco Wholesale Corporation
Another major retailer, Costco (NASDAQ: COST) recently broke news announcing that it will crack down on membership sharing, limiting the use of store membership per person. This follows shortly after video streaming platform, Netflix (NASDAQ: NFLX) said earlier in the year that it will no longer allow password sharing among users.
While many expected a whiplash effect following the announcement, stock performance has remained relatively steady, with July share prices increasing by 5.45%.
Costco is seemingly insulated against both inflationary and interest rate volatility due to its forward-looking business model. The company could benefit from higher rates in the long run, seeing more membership sign-ups, as consumers are looking to take more advantage of discount prices.
What’s more, Costco has noticed that due to rising prices, more members have become executive members, while they may be paying double the membership fee, they often receive additional discounts of up to 2% on certain goods and products.
United Rentals
As one of the largest equipment rental companies in the world, United Rentals (NYSE: URI) currently makes up roughly 13% of the North American equipment rental market.
The company issued its first dividends in January 2023, after beating Q4 2022 earnings, and forward-looking guidance for 2023. Investors have been confident in the company’s strategy to sidestep economic headwinds, as the broader construction and manufacturing industry continues to experience increasing demand.
During its recent earnings call, the company reported year-to-date net cash by operating activities of $2.22 billion, and free flow cash of more than $818 million. The prior outlook for full-year fiscal revenue has increased from $13.7 billion to $14.2 billion, with the current outlook standing at $14.0 billion to $14.3 billion.
The last six months on the stock market have proven that the company is in an expansive period, with stocks rising 23%, and Bank of America declaring a “Buy” position on URI.
Goldman Sachs
Banks and hedge funds typically see improved conditions during higher interest rate periods, and Goldman Sachs (NYSE: GS) has thoroughly isolated itself against any potential economic downturn, after taking up a partnership with Apple (NASDAQ: AAPL).
Back in April, the maker of the iPhone, Apple, announced the release of their high-yield savings account, which offers users a 4.15% APY. The account is backed by Goldman Sachs and could give them an upper hand in the coming months as the Fed continues their talks of further bumping up interest rates.
The high-yield savings account isn’t the only thing Goldman and Apple have been discussing. There have been talks that both companies are looking to develop and launch a Buy-Now Pay-Later plan exclusively available to Apple users, which would provide consumers with banking and financial services through strategic partnerships with Apple.
Shares of GS have been up and down, as the bank, like many others, continues to hold its finger on the pulse following the collapse of Silicon Valley Bank, and other regional banks earlier in the year. The collapse of SVB nearly sparked a bank run, and a financial crisis more severe than that of 2008.
General Motors
The legacy automaker, General Motors (NYSE: GM) has been going head-to-head with electric vehicle (EV) maker, Tesla (NASDAQ: TSLA) in an attempt to establish EV market dominance and provide consumers with the most affordable electric car options.
After CEO of Tesla, Elon Musk announced that the company will be slashing the prices on their models, automakers such as GM, and those that’ve been in a race to electrify their lineups have been at an all-out price war with the global EV superpower.
Although the up-and-coming EV market remains highly competitive, General Motors reported an impressive quarter, seeing improvements across its entire balance sheet, and penning down a 25% increase in quarter-over-quarter revenue. The company is expected to see more than $50 billion in revenue from EV sales by 2025 and has already generated roughly $10 billion in profits in 2022.
For GM this provides them with additional cash to invest in their electric vehicle lineup and the development of new manufacturing and production plants. Many investors continue to hold a positive position on GM, partially due to share prices sitting under $40.00 per share.
Prices slid during the latter half of July, before starting to climb again, with share performance up 15.23% year-to-date.
Going forward
While the interest rate environment remains highly speculative, and investors are scrambling to cushion their portfolios, some companies have proven to be in an advantaged position against the backdrop of 20-year high-interest rates. Although many have faltered at the lackluster outlook, speculative investors remain positive that forward-looking guidance could bring increasing upside for companies that are isolated against the Fed’s aggressive monetary policy that looks to come to an end by September.
