Investing

4 Cheap Stocks That Will Benefit From Rising Interest Rates

The constant question on Wall Street and Main Street is when will the Federal Reserve start raising interest rates. Slow first-quarter, and most likely second-quarter, gross domestic product growth has some saying not until next year. Others say September, and a third group says December. Regardless of when it actually does occur, some industries and stocks are poised to benefit from higher interest rates.

A new report from top-notch Merrill Lynch strategist Savita Subramanian and her team points to segments that are inexpensive and are beneficiaries of rising interest rates. We cross-referenced those industries with the Merrill Lynch research coverage universe and found four top stocks to buy now.

General Motors

This company is in the automobile industry and looks very inexpensive at current levels. Despite all the recall troubles, hedge funds and mutual funds are continuing to stick with General Motors Co. (NYSE: GM), as many view the stock as very undervalued. GM trades just below 8 times estimated 2015 forward earnings. Like Ford, GM has benefited from incredible sales in China to boost revenue. GM invested heavily in China decades ago and grabbed a big chunk of what is now the world’s largest auto market.

With the company facing possible criminal charges over ignition switches, there will continue to be a headline risk cloud over the stock. Long-term, patient investors that can look beyond current issues may stand to make outstanding money on the auto giant.

GM investors are paid an outstanding 4.1% dividend. The Merrill Lynch price target for the stock is $51. The Thomson/First Call consensus price target is much lower at $41.80. Shares closed Friday at $35.70.

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Ciena

This company is inexpensive and in the telecommunications equipment arena. Ciena Corp. (NASDAQ: CIEN) is a leading maker of fiber optic networking equipment sold to telecom carriers. It is expected to get a large chunk of Verizon 100G network build out, with some analysts thinking the company could see as much as 30% of the total. Most analysts feel that Verizon could end up being as much as a 10% customer next year.

In addition to the Verizon deal, other Wall Street analysts have pointed in recent reports that a majority of enterprise and Web/cloud data centers are in the process of running high-speed 40/100G optical interconnects between their data centers. This could also mean added business for Ciena.

The Merrill Lynch price is posted at a surprising $23. The consensus target is higher at $25.09. Shares, which have been on a recent tear, closed on Friday at $23.24.

Capital One

The stock is a consumer finance stock that should do well as interest rates move higher. Capital One Financial Corp. (NYSE: COF) is a very popular stock with many of the Wall Street firms we cover. It offers a broad spectrum of financial products and services to consumers, small businesses and commercial clients through a variety of channels. Numerous Wall Street analysts point out that the bank has built a solid and less cyclical income stream from relationships with transaction-oriented credit card customers.

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The company’s board of directors has authorized the repurchase of up to $3.125 billion of shares of the company’s common stock beginning this quarter and running through the end of the second quarter of 2016. The company is also recently raised the quarterly dividend paid to investors from $0.30 to $0.40

Capital One investors are currently paid a 1.9% dividend. The Merrill Lynch price objective is $94. The consensus target is set at $92.18. The stock closed Friday at $85.02 per share.

Eaton

This is a top electrical equipment stock, and despite some recent currency headwinds it may do very well when rates start to lift. Eaton Corp. PLC (NYSE: ETN) is a power management company providing energy-efficient solutions that help its customers efficiently manage electrical, hydraulic and mechanical power. Eaton continues to focus on doing business right as it leverages the business system for global expansion, product innovation, better profitability and the chase for breakout opportunities.

The stock recently caught a solid upgrade from JPMorgan, and it has been working back toward highs hit last summer. An improving economy and looming interest rate increases make it a solid long-term buy for growth accounts.

Eaton investors are paid a very solid 3% dividend. The Merrill Lynch price target is $94, and the consensus figure is much lower at $77.43. Shares closed last Friday at $73.09.

ALSO READ: Top 10 Warren Buffett and Berkshire Hathaway Dividend Stocks

While the Fed may be slow to raise rates, if the bond market senses growth and inflation picking up, they will do it for the Fed. Investors looking to add stocks that will benefit in that environment have four solid choices from Merrill Lynch.

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