Sell these stocks as interest rates rise

 

The Federal Reserve is widely expected to lift interest rates this week, and most analysts believe at least two more rate hikes are likely to occur through the remainder of the year.

With rates on the rise, investors need to have a good understanding of what impact higher rates could have on their portfolios. Yesterday we took a look at a list of stocks that stand to benefit from rising rates, and today we want to take the opposite approach and focus in on a few companies that could be hurt.

The obvious victims will be companies that thrive when it is cheap for consumers to borrow money. It is not a mere coincidence that the housing market has been so strong while interest rates were near zero. It is much easier to afford a new home when you can borrow money cheaply, and while rates will remain very low on a historic basis, any increase has the potential to impact the sector.

Automotive companies also prosper when rates are low, so there will be pressure on major automakers as rates start to rise.

Another segment of the market that could take a hit is dividend stocks. Investors love yield, so when interest rates were near zero, a lot of money flowed into dividend stocks, and we could see a transfer back into more traditional fixed income assets as interest rates move higher.

Let’s take a look at five stocks that could come under pressure as rates rise, and you could use these examples and the logic behind the opinions to gauge other stocks in your portfolio as well.

D.R. Horton

U.S. homebuilder D.R. Horton (DHI) has enjoyed nice gains so far this year, but rising interest rates could have a negative impact on the overall sector, and result in homebuilder stocks such as DHI giving back some of its recent gains. Rates remain very low, and in all honesty another rate increase or two is unlikely to have a huge impact on the housing recovery, but it may force homebuilders to lower prices, which could impact their bottom line. DHI has a decent valuation, with a P/E of 13.2, and earnings forecast to rise 15.6% this year, and 9.1% next year, but if rates rise a couple more times this year, the company may find it difficult to hit its growth estimates, which would drive shares lower. The stock trades at $32.92, and analysts have an average price target of $34.32.

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Chart courtesy of www.stockcharts.com

General Motors

Automaker General Motors (GM) could feel the sting of rising interest rates on two levels. The first impact could be felt if consumers find it more difficult to obtain financing. Higher interest rates lead to higher monthly car payments, which may result in a decrease in demand for new cars and trucks. 2017 was supposed to be the year when auto sales cooled, but analysts now believe that this could be another record year, with sales cooling off in 2018. If rates do indeed rise three more times through the course of the year, the auto industry may struggle to put up another record level of sales for the year, and auto makers like General Motors and Ford (F) will be easy targets for investors that want to find better long-term value in sectors that stand to gain from higher rates such as financials and insurers. General Motors is also a very attractive dividend play at this time, with a yield of 4.1%, and while that yield will remain attractive even if interest rates start to rise, there could be some money transfer out of the stock and back into fixed income assets as their yields start to rise. The stock trades at $36.92, and analyst have set an average price target of $39.33 on the stock.

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Chart courtesy of www.stockcharts.com

Verizon

Utilities such as Verizon (VZ) are famous for their high yields, and they make the perfect investment while interest rates remain low. VZ currently offers a yield of 4.7%, which makes it very attractive for investors in search of yield. While the yield is nice, the rest of the story for Verizon is not so appealing. The smartphone market is extremely saturated and competitive, and the company faces some big challenges with its new unlimited data plans, which some analysts believe will lead to slower speeds and diminished customer satisfaction. The stock currently has a P/E of just 15.4, but with earnings forecast to fall 0.5% this year, and rising just 2.6% next year. With such low growth estimates, it will be hard for the stock to move higher, and if money flows out of dividend stocks, we could see VZ shares extend their recent losses. The stock trades at $49.37, with an average price target of $52.38.

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Chart courtesy of www.stockcharts.com

Altria

Another sector that is known for its high dividend yields is the tobacco sector. The tobacco sector is still enjoying strong sales internationally, but it has struggled with sales in the U.S., as consumers become more health conscience and smoking rates have fallen. The industry also faces the reality of a lot of investors having ethical restrictions in place to prevent the purchase of any tobacco-related stocks. As such, tobacco companies tend to offer high yields to keep investors interested. Altria (MO) currently offers a dividend yield of 3.2%, which is high enough to keep investors in the stock when rates are near zero, but as rates start to rise the yield is not high enough to protect the stock from money transferring back into fixed income assets. The stock has a P/E of 10.3, with earnings forecast to rise 8.9% this year, and 8.2% next year. The stock is trading at $75.43, above the average price target of $72.29.

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Chart courtesy of www.stockcharts.com

Exxon Mobil

Rising interest rates should lead to a stronger U.S. dollar. The dollar has been incredibly strong over the last year, but higher interest rates could result in an even stronger greenback. While it is not always the case, a stronger dollar tends to lead to lower commodity prices, and if oil prices start to fall, shares of big oil stocks like Exxon Mobil (XOM) will come under pressure. XOM is already in a downward trend, with shares trading in the lower end of their 52-week range. The stock’s valuation is still a bit high, with a P/E of 43, but earnings are forecast to rise 71% this year and 20% next year. The strong growth estimates are being priced into the stock, which is why the valuation is where it is, but if we see oil prices start to trend lower it will be tough for the company to hit its growth estimates, and the stock will extend its recent losses. XOM is trading at $80.83, and analysts have an average price target of $91.08 on the stock.

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Chart courtesy of www.stockcharts.com

Symbols: DHI GM MO VZ XOM

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