Rising interest rates could be good news for these stocks.
Inflation may have finally peaked in July, but that doesn’t mean interest rates will be peaking anytime soon. U.S. inflation rates remain well above the Federal Reserve’s 2% target, and Fed Chair Jerome Powell has repeatedly said inflation is the Fed’s top priority in 2022. The Federal Open Market Committee has already raised interest rates by 2.25% this year, and the bond market is currently anticipating further hikes before the end of 2023, according to the CME Group. Here are seven buy-rated stocks that have historically outperformed when interest rates rise, according to Bank of America analysts.
Marathon Petroleum Corp. (ticker: MPC)
Since 1972, no stock has shown a better relative performance sensitivity to 10-year U.S. Treasury yields than oil refiner Marathon Petroleum. That trend has certainly continued in 2022. Soaring oil and gas prices have pushed Marathon shares higher by 65.6% year to date, making it by far the best-performing stock on this list. Analyst Doug Leggate says Marathon’s current buyback authorization plan could reduce its share count by a whopping 35%, and he expects the company to boost its 2.5% dividend to around 3.7%. Bank of America has a “buy” rating and $130 price target for MPC stock, which closed at $97.47 on Aug. 12.
NXP Semiconductors NV (NXPI)
NXP Semiconductors produces high-performance, mixed-signal chips used by the automotive, mobile payment and other end markets. Analyst Vivek Arya says NXP has been executing well in a difficult environment in 2022 and has opportunities to boost profitability via pricing leverage in the auto market. Arya says NXP is his top auto semiconductor stock pick, and its strong variable cost profile and mixed foundry and fabless capabilities should help support margins. He projects 19.5% revenue growth and 25.7% net income growth for NXP in 2022. Bank of America has a “buy” rating and $200 price target for NXPI stock, which closed at $187.47 on Aug. 12.
United Rentals Inc. (URI)
United Rentals is the largest equipment rental company in the world. Analyst Michael Feniger says United has resilient end markets and is managing a difficult inflationary environment very well. In addition, he says United’s guidance is achievable and the stock is a “deep value” assuming the U.S. avoids a recession. United is on track to end 2022 with its strongest balance sheet in more than a decade, and Feniger projects the company will generate $2 billion in free cash flow this year. Bank of America has a “buy” rating and $350 price target for URI stock, which closed at $336.55 on Aug. 12.
Equinix Inc. (EQIX)
Equinix is a specialized real estate investment trust, or REIT, that serves as the world’s largest data center operator. Equinix shares are down more than 12% so far in 2022, but analyst David Barden says the stock is undervalued based on the impressive demand trends in network-neutral colocation, a market in which Equinix is uniquely positioned. Equinix recently reduced its 2022 guidance, but Barden says the foreign exchange headwinds that have pressured its growth will soon subside. He projects 10.3% revenue growth in 2022. Bank of America has a “buy” rating and $865 price target for EQIX stock, which closed at $704.56 on Aug. 12.
SBA Communications Corp. (SBAC)
SBA Communications is a specialized REIT that owns and operates a global wireless communications tower network. SBA reported 10.7% site leasing revenue growth and 39.5% site development revenue growth in the second quarter. In addition, adjusted funds from operations per share was up 16.3%. Barden says SBA has demonstrated consistent organic revenue growth and is benefiting from global 5G network deployments. Tower REIT valuations are relatively high, but Barden says analyst earnings estimates for 2022 and 2023 will likely continue to rise. Bank of America has a “buy” rating and $425 price target for SBAC stock, which closed at $350.04 on Aug. 12.
General Motors Co. (GM)
General Motors and other leading automakers have navigated a difficult situation, battling an automotive chip shortage and other supply chain issues. In fact, GM is the worst-performing stock on this list in 2022, down 29% year to date. However, GM has historically been a top-performing stock when interest rates are rising. Analyst John Murphy says GM shares are attractively valued, trading at just 6 times forward earnings. He says GM can use its extremely profitable legacy business to fund $35 billion in planned electric vehicle investments through 2025. Bank of America has a “buy” rating and $95 price target for GM stock, which closed at $39.48 on Aug. 12.
Morgan Stanley (MS)
Morgan Stanley is one of the largest U.S. investment banks and financial services firms. Analyst Ebrahim Poonawala says Morgan Stanley is a “best-in-class franchise” with a stock trading at a depressed valuation. Poonawala says Morgan Stanley’s common equity tier 1 capital ratio of 15.2% creates opportunities for the bank to buy back its cheap shares and boost its 3.4% dividend. Poonawala says Morgan Stanley has a differentiated business model that should generate superior growth and returns over the medium and long term. Bank of America has a “buy” rating and $98 price target for MS stock, which closed at $91.66 on Aug. 12.
7 best stocks to buy for rising interest rates:
— Marathon Petroleum Corp. (MPC)
— NXP Semiconductors NV (NXPI)
— United Rentals Inc. (URI)
— Equinix Inc. (EQIX)
— SBA Communications Corp. (SBAC)
— General Motors Co. (GM)
— Morgan Stanley (MS)
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Update 08/15/22: This story was published at an earlier date and has been updated with new information.