Investing

Merrill Lynch Nervous About Rate Hike and Summer Shock: 4 Stocks That Could Benefit

Lee Jackson

Published: May 31, 2016 8:20 am

Last Updated: January 13, 2020 7:24 am

We have written in depth about the catalysts coming this summer that could be very disconcerting for the stock market, and with the indexes pressing again close to the highs of last summer, it may be smart to consider the possibilities. With a potential Federal Reserve rate increase in June or July, a vote on whether Great Britain leaves the European Union, and a summer chock full of political hyperbole leading up to the party conventions, which could themselves be raucous, volatility could jump.

In a new research note from Merrill Lynch and the firm’s superb strategist Savita Subramanian, they pretty much stay with their bearish stance that they have had most of 2016. They note the items mentioned above as possible summer shocks, and they are predicting a W-shaped recovery, which could mean another leg down for oil and stocks that have remained highly correlated to the sector.

The report points to a group of sectors that the Merrill team believe are already cheap and will do well in a hawkish rate environment. We screened the sectors for stocks rated Buy at Merrill Lynch that also pay good dividends.

FedEx

Air freight and logistics do well in a tightening environment, and this company is the gold standard. FedEx Corp. (NYSE: FDX) provides transportation, e-commerce and business services in the United States and internationally. Its FedEx Express segment provides various shipping services for the delivery of packages and freight. The FedEx Ground segment provides business and residential money-back guaranteed ground package delivery services, and it consolidates and delivers high volumes of low-weight and less time-sensitive business-to-consumer packages. The FedEx Freight segment offers less-than-truckload freight services, as well as freight-shipping services.

The air and road freight giant posted outstanding first-quarter results and the Express segment posted astounding 9% margins that came in higher than even the Merrill Lynch estimates. Toss in an ongoing $1 billion share buyback program, and the potential for the company remains outstanding.

FedEx investors receive a 0.61% dividend. The Merrill Lynch price objective is $170, and the Thomson/First Call consensus is higher at $178.39. The stock closed last Friday at $164.47.

Goldman Sachs

This company continues to be the gold standard of Wall Street banks and trades at a low 11.2 times estimated 2016 earnings. Goldman Sachs Group Inc. (NYSE: GS) has a gigantic institutional equity, debt and derivatives business, an ultra high net worth clientele, top investment banking and capital markets expertise. The bank continues to be a dominant force around the world and is one of the most sought after in the world. And it is one of the very few that dictate who can be a client at the firm.

In investment banking, the company has the preeminent client franchise. Goldman Sachs advised on more than $1.5 trillion of announced mergers and acquisitions transactions last year, the highest level the bank has ever recorded. It also has maintained a leading market share over the past 25 years. It maintained a market position when merger and acquisition activity was dominated by technology in 1999, by financials in 2008 and by natural resources in 2014. The bottom line is, regardless of where market strength is in any given year, Goldman Sachs is up to the task.

Goldman Sachs shareholders receive a 1.63% dividend. Merrill Lynch has a $185 price target for the stock, and the consensus target is $189.39. The stock closed Friday at $159.53.
JPMorgan

This stock trades at a very low 11.2 times estimated 2016 forward earnings, and banks do well in a rising rate scenario. JPMorgan Chase & Co. (NYSE: JPM) is expected to benefit from commercial loan growth and an upturn in capital spending. Wall Street analysts agree that the stock seems attractively valued on estimated price-to-earnings and a very solid price-to-book value. Some on Wall Street have cautioned that last year’s divestiture of the physical commodities business could provide an earnings headwind throughout this year.

Improvement in loan growth, slow but improving equity capital markets, and a steady increase in deposits will be a solid plus. Trading at a discount to many of the large cap banks on 2016 earnings estimates helps upside potential as well. With $2.6 trillion in assets on a worldwide basis, and one of Wall Street’s savviest leaders in Jamie Dimon, the stock is a solid buy for investors.

Dimon also recently put his money where his mouth was and was reported to have bought a stunning 500,000 shares of the stock for a massive $26 million. It brings his total holdings in the bank to 6.7 million shares, worth over $360 million.

JPMorgan investors receive a 2.93% dividend. The $72 Merrill Lynch price target is higher than the consensus price target of $70.78. The shares closed Friday at $65.43.

Principal Financial

Insurers also do well in a rising rate environment, and this is one of the top companies in the industry. Principal Financial Group Inc. (NYSE: PFG) provides retirement, asset management and insurance products and services to businesses, individuals and institutional clients worldwide.

Its Retirement and Income Solutions segment provides a portfolio of asset accumulation products and services, including retirement savings and income. The Principal Global Investors segment provides equity, fixed income, real estate, and other alternative investments, as well as asset allocation, stable value management and other structured investment strategies.

The Principal International segment offers pension accumulation and income annuity products, mutual funds, asset management and life insurance accumulation products, as well as voluntary savings plans, in Brazil, Chile, China, Hong Kong Special Administrative Region, India, Mexico and Southeast Asia. The U.S. Insurance Solutions segment provides individual life insurance products, including universal and variable universal life insurance and term life insurance, as well as specialty benefits, consisting of group dental and vision insurance, individual and group disability insurance and group life insurance.

Shareholders receive a 3.5% dividend. The Merrill Lynch price target is$50. The consensus target is $45.71, and shares closed Friday at $44.41.

Four very solid companies to buy that should do well if the fed funds increases start coming again this summer. While all stocks will get hit if we have another 10% sell-off, these are not as price inflated as some and should perform better.