5 stocks that aren’t banks to play on a steepening yield curve

Text size

You don’t have to own bank stocks to make money when rates rise. While financials profit the most, other sectors such as equipment manufacturers, materials manufacturers and power producers are also doing well in a rising rate environment. Steelmaker Nucor (NUE), metal miner Freeport-McMoRan (FCX), capital goods maker Emerson Electric Company (EMR), truck maker Paccar (PCAR) and oil producer ConocoPhillips (COP) are all interesting players at the moment. More information on our choices later. Of course, if interest rates rise and then fall again like they did from March 2021 to August 2021, the party will be over before it really warms up. But there is reason to believe that rates could stay high for a while this time around. Inflation is skyrocketing and the Federal Reserve has suggested it will cut back on bond purchases soon. Less money invested in bonds lowers their prices, increasing their returns. Recently, the yield curve – the difference between long-term bond yields and short-term rates – has widened as the 10-year Treasury yield has erupted. This means that the markets experience higher long-term inflation, which is often driven by strong economic demand. The demand for manufactured goods and petroleum generally increases. But the expansion of the yield curve is probably not over. Over the next few quarters, the spread between 10-year and 2-year rates, currently 1.18 percentage points, may reach 1.7 percentage points, said Dennis DeBusschere, president of 22 Research. Financial stocks are the biggest winners, and this is already reflected in their stock prices. Not only do banks lend more when the economy is expanding, but each loan is more profitable because banks can borrow at low short-term rates to lend at higher long-term rates. Financial stocks in the S&P 500 are the most correlated with changes in the yield curve of any sector over the past 10 years, according to Jefferies. But there are other sectors that can see big stock market gains. Since 2010, the S&P 500 in Materials, Industrials and Energy have the second, third and fourth highest correlation with the yield curve, respectively, according to Jefferies. These sectors are expected to post annualized gains of 13 to 15% if the yield curve widens, according to DeBusschere. A steepening yield curve indicates that investors anticipate a higher likelihood of improving economic growth and faster earnings growth for economically sensitive companies. They will often pay a higher price for these “cyclical” actions. Already, these stocks have rebounded. Materials Select Sector SPDR (XLB), Industrial Select Sector SPDR Fund (XLI) and Energy Select Sector SPDR Fund (XLE) are up 5.1%, 4.7% and 22%, respectively, since closing on September 21 before the Fed. was talking. Still, “I think industrial cyclicals and materials will do pretty well over the next 6 months,” said Doug Ramsey, chief investment officer of The Leuthold Group. “I think the curve will steepen further.” Let’s go back to our five actions. All of them rank in the top 40 stocks most correlated to the yield curve of all names in the S&P 500. Nucor trades low and may not reflect its potential for profit. It is trading at 6 times projected earnings per share for the next 12 months, below its 5-year average of 12 times, according to FactSet. The price of hot-rolled coils is currently $ 1,800 per unit due to supply shortages, but everyone thinks it’s going to come down sharply. Nucor’s current valuation points to a future steel price of $ 750, but Curt Woodworth, a Credit Suisse analyst, believes it will remain above $ 1,000. It makes Nucor a good buy, he says. It predicts 2022 EPS that is 67% higher than current estimates. “It’s kinda easy to say it all [earnings] means comes back, ”says Woodworth. “The standardized pay power is significantly higher than people think. ConocoPhillips is similar. Analysts will likely revise their EPS estimates upwards soon, said John Freeman, analyst at Raymond Jaymes. Analysts are looking for 2022 EPS of $ 6.39, but they have yet to factor in the recent surge in oil prices. “The estimates are going to be revised upwards,” says Freeman. “Commodity prices have gone up so much in the last six to eight weeks. Meanwhile, the stock may not reflect much of that stream of profits. The company’s enterprise value is just under 5 times the expected earnings for 2022 before interest, taxes and non-cash expenses. Historically, it often trades at a multiple of around 7 times, Freeman says. The other three stocks are also showing strong vital signs for further stock market gains. Emerson Electric has risen 2.5% since September 21. It is trading at around 20 times earnings, consistent with its 5-year average, so it may have room to run on solid earnings reports, even if analysts don’t increase their forecasts. Analysts polled by FactSet expect EPS to rise in 2022 and then 9% in 2023, which the stock will assess by the end of next year. The company reports profits on Nov. 3, with Freeport McMoRan rising 28% since Sept. 21. It is trading at 11 times earnings, cheap from its 5-year average of 15 times, while EPS is expected to grow 19% in 2022. Profits are October 21. Paccar stock has gained 10.4% since Sept. 21, is trading at 13 times earnings, cheaper than its 5-year average of 14 times and is expected to see EPS rise by 27% next year and 9 times. % in 2023. is October 26. Get ready for the second act of cyclical stocks. Write to Jacob Sonenshine at [email protected]