We recently wrote that shorting the Treasury bond market may very well be the next biggest short-sale trade since the subprime mortgage short. While rates have dipped a little in the past week as investors fear the debt ceiling fight, it is still a solid thesis with rates at historical lows that will go higher. So if you do not want to short the Treasury market, we thought a buy list of stocks that should excel in a rising rate environment might be just the ticket.
Typically a rising rate environment is a negative for many stocks. Rising rates can mean everything from higher borrowing costs and material costs to labor costs. But some stocks, especially in the financial sector, tend to thrive in a rising rate scenario. The economics and financial analyst team at UBS A.G. (NYSE: UBS) came up with a list of stocks that should outperform.
The UBS economists are expecting a 60 basis point rise in the 10-year treasury yield in 2013 and 2014. The 10-year yield closed yesterday at 1.82%. So that would put it at a 2.42% in 2013 and at 3.02% in 2014. Those yields may still seem low, but an increase to a 3.02% level would be a 66% increase in just two years or less.
There are two areas in the financial sector that will benefit from rising rates. Life insurance companies and e-brokers, or Internet brokers, can both thrive in that environment. The e-brokers tend to benefit more from the rise in short rates, while the life insurers see a greater benefit from the rise in long rates.
For the e-brokers, the UBS financial analysts favor these names. TD Ameritrade Holding Corp. (NYSE: AMTD) was at $18.o6 in early trading, and the street consensus target price is right at $18. They also like Charles Schwab Corp. (NYSE: SCHW), which is trading near $15.22. The street consensus on this name is again right in line at $15.
As benefiting from the long-term rate increases, UBS likes these names. Lincoln National Corp. (NYSE: LNC) saw $27.32 in early trading, and the street consensus is $30.50. Unum Group (NYSE: UNM) is trading near $22.12 and has a street target of $24. Also on the list is Hartford Financial Services Group Inc. (NYSE: HIG), which was up to $23.8o in early trading and has a Wall St. target of $25.50.
Like the timing on the Treasury short, the question is always when is the best time to get in. As we mentioned, rates have dipped as investors are wary of a protracted debt ceiling fight like we saw in the summer of 2011. If rates go significantly lower during the upcoming debate over the debt ceiling, investors may have the perfect opportunity to add these stocks to their portfolio.
Filed under: 24/7 Wall St. Wire, Analyst Calls, Austerity, Banking & Finance, Bonds, Financial Stocks Tagged: AMTD, featured, HIG, LNC, SCHW, UBS, UNM