Stocks to buy

Although it’s no guarantee that the Federal Reserve will raise benchmark interest rates, it may be an inevitability, thus sparking interest in stocks to buy for rising interest rates. Early last week, Fed Chair Jerome Powell left open the door for higher and quicker rate hikes. Essentially, economic data came in hotter than anticipated, leading to stubbornly high inflation. In Powell’s view, rising prices must be curbed to avoid long-term economic consequences.

More recently, the U.S. economy added 311,000 jobs in February, outpacing expectations. Typically, countries aim for strong employment. However, too strong of a labor market implies more dollars chasing after fewer goods (i.e. inflation). Unfortunately, then, Powell may have little choice but to tighten the money supply. If that happens, investors can anticipate a significant impact to the equities sector, greatly affecting stocks to buy for rising interest rates. To stay ahead of the curve, investors may want to adjust their portfolios before the seemingly inevitable arrives. With that in mind, below are relevant stocks to buy for rising interest rates.

PGR Progressive $139.53
SRE Sempra Energy $143.97
DG Dollar General $216.80
RSG Republic Services $128.40
AWK American Water Works $136.37
PSX Phillips 66 $95.52
KR Kroger $46.85

Progressive (PGR)

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On paper, rising interest rates should help insurance giant Progressive (NYSE:PGR). According to the Office of Financial Research, “[m]odestly rising interest rates are generally positive for the insurance industry. When rates rise at a reasonable pace, portfolio yields also rise. With these new, higher-yielding corporate and other bond purchases, insurers’ investment earnings also increase.” However, that’s not the whole story. For instance, higher-than-expected claim costs may impair insurers’ earnings. Fortunately, that’s not the reason why I consider PGR one of the stocks to buy for rising interest rates. Rather, I like Progressive because it cynically benefits from a captive audience. Put another way, you really can’t drive without a minimum level of insurance coverage.

To be fair, PGR appears overvalued. That said, since the January opener, PGR gained 8% of its equity value. And in the trailing 365 days, it’s up over 33%. Why? Fundamentally, I believe investors recognize the coming influx of demand. As society normalizes and traffic level returns to and even exceeds pre-pandemic norms, traffic incidents will rise. Again, it’s cynical but here we are.

Sempra Energy (SRE)

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If you want another dose of cynicism with your stocks to buy, look no further than utility firm Sempra Energy (NYSE:SRE). At the most basic level, Sempra and its ilk benefit from a concept called a natural monopoly. Because competing in the underlying industry requires overcoming a massive barrier to entry, most enterprises don’t even try. Therefore, Sempra stands largely alone in its market.

And what a lucrative market it is. Covering swathes of Southern California, if you want to live in places like San Diego, you got to pay up. One of the beneficiaries happens to be Sempra Energy. Sure, people can always move out and relocate to, say, South Carolina. But for many Americans – and people across the globe – Southern California represents a “grail” region. Put another way, Sempra likely benefits from permanent relevance. That’s why I’m not as concerned about the less-than-ideal financials. Sempra doesn’t have the greatest stability in the balance sheet and its revenue growth is so-so. However, it’s consistently profitable, making it one of the stocks to buy for rising interest rates.

Dollar General (DG)

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For the topic of stocks to buy for rising interest rates, Dollar General (NYSE:DG) practically sells itself. True, at the moment, the robust jobs market suggests that few consumers would consider shopping at dollar discount stores. However, with the Fed committed to tackling stubbornly elevated inflation, it’s almost inevitable that mass layoffs will materialize. At that point, DG would become extremely relevant.

Further, with the banking sector suffering from sharp losses recently, we may have to put aside the idea of a soft landing. Indeed, we should be grateful for any landing that doesn’t involve heavy casualties. Still, somehow or another, the Fed will control inflation. That determination bodes poorly for the wider economy. However, it could be cynically beneficial for Dollar General.

Also, DG enjoys several positive fiscal attributes. First, Gurufocus.com notes that DG is modestly undervalued based on its proprietary calculations for fair market value (FMV). Objectively, the discount retailer enjoys a strong three-year revenue growth rate of 14.6%. As well, its net margin stands at 6.49%, outpacing 89% of the competition.

Republic Services (RSG)

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Without question, Republic Services (NYSE:RSG) is one of the boring entries among stocks to buy for rising interest rates. As a waste disposal and management specialist, Republic doesn’t exactly offer a groundbreaking business. At the same time, it’s part of society’s infrastructure. During times of trouble, Republic may shine bright.

That’s because no matter how advanced we become, someone has to take out the trash. While it might not be politically correct, you don’t see too many academic administrators encouraging their students to enter the waste disposal business. But again, someone has to do it; otherwise, the piling up of trash may cause severe health problems, among other concerns.

Given the essential nature of the business, RSG easily ranks among the stocks to buy for rising interest rates. Further, the company enjoys attractive financial metrics. Operationally, Republic’s three-year revenue growth rate stands at 10.1%, outpacing 61% of its peers. In addition, its net margin pings at 11%, above 72.35% of the industry.

American Water Works (AWK)

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A public utility firm, American Water Works (NYSE:AWK) provides water and wastewater services in the U.S. Per its public profile, the company offers these services to approximately 1,700 communities in 14 states, serving a population of roughly 14 million. Because of the steep barriers to entry, American Water benefits from a natural monopoly status.

Cynically, then, AWK makes an excellent case for stocks to buy for rising interest rates. It’s possible that the Fed could take off the kiddie gloves, aggressively raising borrowing costs. In turn, we could see an acceleration in layoffs. However, skimping on core utility bills would be the last thing on households’ to-do lists. Beyond the “positive” narrative, AWK enjoys encouraging financial data. First, Gurufocus.com identifies AWK as modestly undervalued based on its proprietary FMV calculations. In terms of the bottom line, the company is consistently profitable. Over the trailing year, its net margin stands at 21.62%, above 87.61% of sector players.

Phillips 66 (PSX)

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Fundamentally, downstream hydrocarbon energy specialist Phillips 66 (NYSE:PSX) also features a narrative for stocks to buy for rising interest rates that sells itself. For one thing, politicians can scream all they want about the electrification of mobility. Over the next several years, combustion-powered vehicles will remain relevant. Mainly, it comes down to cost as electric vehicles tend to be pricier than their combustion-powered counterparts.

More importantly, society has started to normalize rapidly. We see that through a growing number of companies recalling their workers back to the office. Not only that, with layoffs – particularly in the high-paying tech space – also rising, employees can’t afford to confront their employees. Translation? Greater traffic volume on U.S. roadways.

As I mentioned earlier, this dynamic should help Progressive. It will almost certainly help Phillips 66, making it one of the stocks to buy for rising interest rates. Lastly, Wall Street analysts believe in PSX, pegging it a consensus moderate buy. Also, their average price target stands at $128.20, implying nearly 27% upside potential.

Kroger (KR)

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For the last idea for stocks to buy for rising interest rates, I’m going with the obvious in grocery giant Kroger (NYSE:KR). Obviously, humans require a minimum amount of calorie consumption; otherwise, things just don’t work well. Interestingly, KR represented one of the top performers last week, gaining nearly 3%. For the year, KR is up almost 6%.

That’s significant because the benchmark S&P 500 index only gained 1% on a year-to-date basis. Fundamentally, Kroger benefits from being on the lower rungs of the trade-down effect. In other words, when consumers face financial pressures, they’ll cut out discretionary spending first. This means frivolous categories such as premium fine-dining establishments stand at risk of revenue volume loss.

With Kroger, people are unlikely to cut into spending there because not many cheaper alternatives exist. Further, the company benefits from certain positive financial metrics. For instance, its three-year revenue growth rate stands at 10.3%, outflanking 76.68% of the competition. Also, its book growth rate during the same period is 8.6%. Not surprisingly, Kroger also enjoys a consistently profitable business. As pressures rise, you should consider KR as one of the stocks to buy for rising interest rates.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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