The writing has been on the wall for some time. Federal Reserve Chair Jay Powell let Pandora out of the interest rate box when he finally noted that the term “transitory” inflation needs to be retired. Faced with mounting inflation data, some of which is the worst in over 30 years, he and the rest of the Fed governors have been painted into a corner of their own making and most likely will have to raise interest rates next year, and likely faster than expected.

In addition, the pace of quantitative easing tapering also is expected to accelerate. Typically, rising interest rates are bad for many sectors, as borrowing costs for companies are increased. Yet, certain companies in specific silos can actually benefit from rising rates. We found five that make sense for growth and income investors looking to be ready for the increases. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
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Ares Capital

This is a favorite business development company across Wall Street. Ares Capital Corp. (NASDAQ: ARCC) is a leading specialty finance company that provides one-stop debt and equity financing solutions to U.S. middle-market companies, venture capital-backed businesses and power-generation projects.

Ares Capital originates and invests in senior secured loans, mezzanine debt and, to a lesser extent, equity investments through its national direct origination platform. The company’s investment objective is to generate both current income and capital appreciation through debt and equity investments primarily in private companies.

Top Wall Street analysts believe the strength of the company’s origination platform, sizable balance sheet and ample liquidity position it favorably in a very competitive investing environment. Some believe that with the current tight spread environment Ares Capital has the scale and industry relationships to continue to make competitive, high-credit-quality investments. Plus, with interest rates expected to move higher, they could supply higher coupon loans.

Investors in Ares Capital stock receive a 7.92% dividend. Citigroup has a Buy rating and a $23 price target. The consensus target is $21.27, and the stock closed on Thursday at $20.69.

Shares of this top bank backed up big-time recently and are offering an outstanding entry point. Citigroup Inc. (NYSE: C) is a leading global diversified financial service company that provides consumers, corporations, governments a broad range of financial products and services.
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Citigroup offers services such as consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management. It operates and does business in more than 160 countries and jurisdictions in North America, Latin America, Asia and elsewhere.

Trading at a still very cheap 7.8 times estimated 2022 earnings, this pick looks very reasonable in what remains a volatile stock market and in a sector that has dramatically lagged. With the potential from better net interest margins, as well as an increase in deposits, higher rates could be a solid positive for the bank.

Investors receive a 3.27% dividend. The Jefferies price target for the Buy-rated shares is $87, while the consensus target is $84.42. Citigroup stock closed trading at $62.14 on Thursday.

CubeSmart

This self-storage real estate investment trust may seem an odd beneficiary of rising rates, but it should benefit. CubeSmart (NASDAQ: CUBE) is a self-administered and self-managed REIT. Its self-storage properties are designed to offer affordable, easily accessible and secure storage space for residential and commercial customers. According to the Self-Storage Almanac, CubeSmart is one of the top three owners and operators of self-storage properties in the United States.

In a rising rate environment, hard assets like real estate gain in value, and the self-storage REITs are also in a good position as capital expenditures and the need for additional capital are often very low.

Shareholders receive a 3.13% dividend. Raymond James recently upgraded CubeSmart stock to Outperform with a $60 price target. The posted consensus target is in line at $60.30. The last trade for Thursday was reported at $54.48 a share.

JPMorgan

This stock trades at a still reasonable 13.3 times estimated 2022 earnings. JPMorgan Chase & Co. (NYSE: JPM) is one of the leading global financial services firms and one of the largest banking institutions in the United States, with about $2.6 trillion in assets. The company as it is today was formed through the merger of retail bank Chase Manhattan and investment bank J.P. Morgan.
JPMorgan has many operating divisions, including investment and corporate banking, asset management, retail financial services, commercial banking, credit cards and financial transaction services.

Top analysts are very positive on the money center and investment giant, largely because the industry titan faces a continued broad recovery in nearly every aspect of its business. It has a leading M&A advisory and capital markets product set and market share. It has a massive footprint of corporate and commercial banking customers. And it has a sizable wholesale payments businesses. The bank has proven that it has the wherewithal to invest continually in people, products, and platforms to further its market share base, extending its competitive advantage versus most peers.
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Furthermore, the bank should benefit from an increase in rates as the net interest margins should rise, providing additional income versus deposits. This ratio measures how successful a firm is at investing its funds in comparison to the expenses on the same investments.

Investors receive a 2.46% dividend. Wells Fargo’s Overweight rating comes with a price target of $210. The consensus target for JPMorgan Chase is much lower $177.48, and shares closed on Thursday at $160.46.

Morgan Stanley

This is one of Wall Street’s white-glove firms, and it may be among the best buys among the banking and investment stocks. Morgan Stanley (NYSE: MS) is a global investment bank with leading positions in investment banking (M&A and equity underwriting), equity trading and wealth management, which contributes nearly 50% of firmwide revenues. The firm also has an asset management business, which adds to the lower-risk business profile the firm has pursued since the financial crisis.

Last year, this Wall Street investment bank agreed on a $13 billion purchase of discount brokerage E-Trade. With 5.2 million customers, it was once a revolutionary platform that “helped usher in a dramatic shift among financial services firms” and fueled the rise of indexes and exchange-traded funds, making investing vastly easier for do-it-yourself investors.

Investors receive a 2.77% dividend. The Neutral rating at Citigroup was just raised to Buy and the firm has a $115 price target, which would be a 52-week high. Morgan Stanley stock closed most recently at $100.58 a share.

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The Federal Reserve is in very dangerous territory, as it has kept the uber-loose monetary policy in place for way too long and the inflation numbers are reflecting that in no uncertain terms. While the actual rates, even if the Fed raised four times in 2022, would still be around the 1% level, which is historically still very low, the psychological impact may be one of the biggest traumas, especially to risk-complacent investors.

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