Stocks usually don't like good news about unemployment. We looked for stocks that like higher interest rates.
Unemployment has held steadily at the lowest levels since 2007 after jobless claims rose by a negligible amount and firings fell off across the first half of April, contributing to a general consensus that the US economy is picking up speed.
Consumer confidence rose again, which could soon start to prompt companies to ramp up production to meet greater demand.
Now, when unemployment changes, a lot of different things happen at once:
- The government's expenses go down, as it's processing fewer claims.
- Spending goes up (depending on what kind of jobs are being created and how many) .
- Wages go up, because employers are competing for fewer workers.
- The stock market (usually) goes down.
That last one is more counterintuitive than the rest. But if you think about it, higher wages means higher costs, which will affect earnings. The reason we focus on unemployment as the bellwether of the economy is that it's more likely to affect normal people, and hence politicians talk about it more.
Statistically, the stock market usually reacts poorly to lower unemployment. The main reason is that it usually portends rising interest rates. Most stocks hate rising interest rates because they make other assets like bonds or currencies more attractive.
But that's not true for every industry. Financial services in particular often like higher interest rates because many of those companies are required by law to deploy their cash reserves in stable, short-term US bonds.
Companies will benefit disproportionately to the amount of cash they have on hand. The more cash they have, the more interest they will earn when they lend the money to the government.
Financial services stocks with the most cash on hand are usually payroll services companies (who need to hoard cash for when they pay out salaries for their clients); large custodial banks who hold cash for big institutions (think big banks like J.P Morgan [JPM]); and institutional stock brokerages who earn interest on the cash they hold for their customers.
Focusing on 40 of the biggest names in these three related industries, we looked for ones that were cheaply priced relative to the amount of cash they had. We only looked at larger names with a market cap of $10 billion or more.
To do that, we targeted companies with a very low ratio of price-to-free-cash-flow (P/FCF). This means the company is cheap relative to the amount of free-cash-flow it has. If tapering continues and interest rates start to rise, these companies could see their operating margins fattened by the Fed.
Do you think these firms will benefit from rising interest rates? Use the list below to begin your analysis and let us know what you think in the comments.
Click on the interactive chart to view data over time.
1. Bank of America Corporation (BAC, Earnings, Analysts, Financials): Provides banking and financial services to individuals, small- and middle-market businesses, corporations, and governments primarily in the United States and internationally. Market cap at $175.76B, most recent closing price at $16.53.
2. Citigroup, Inc. (C, Earnings, Analysts, Financials): Provides consumers, corporations, governments, and institutions with a range of financial products and services. Market cap at $148.31B, most recent closing price at $48.98.
4. E*TRADE Financial Corporation (ETFC, Earnings, Analysts, Financials): Provides online brokerage and related products and services primarily to individual retail investors in the United States. Market cap at $6.52B, most recent closing price at $22.71.
6. Morgan Stanley (MS, Earnings, Analysts, Financials): Provides various financial products and services to corporations, governments, financial institutions, and individuals worldwide. Market cap at $57.74B, most recent closing price at $30.31.
(List compiled by James Dennin. Monthly returns sourced from Zacks Investment Research.)
Analyze These Ideas: Getting Started
- Read descriptions for all companies mentioned
- Access a performance overview for all stocks in the list
- Compare analyst ratings for the companies mentioned
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Dig Deeper: Access Company Snapshots, Charts, Filings
- Bank of America Corporation(BAC, Chart, Download SEC Filings)
- Citigroup, Inc.(C, Chart, Download SEC Filings)
- Cowen Group, Inc.(COWN, Chart, Download SEC Filings)
- E*TRADE Financial Corporation(ETFC, Chart, Download SEC Filings)
- JPMorgan Chase & Co.(JPM, Chart, Download SEC Filings)
- Morgan Stanley(MS, Chart, Download SEC Filings)
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