The Best Sector For Rising Rates
Yet it's the insurance companies that perhaps stand to garner the most benefits from rising interest rates. As I wrote in May, I've been recommending insurance stocks over the past year, largely because so many of them have been trading below book value and embarking on massive share buybacks. And although this entire group has been rallying higher, many insurers, amazingly, still trade below book value.
Yet there's a correlation between book value and interest rates to consider. As rates rise, these insurers are likely to profit sharply. And faster-rising profits leads to rising book values at an accelerating pace. So these insurers, despite posting solid recent gains, could be among the market leaders in 2014 and 2015 as well.
Risks to consider: Though we appear to be on the cusp of a rising interest rate environment as the global economy strengthens, a pullback in global economic growth would lead interest rates to stay depressed for a considerably longer time.
Action to Take --> You are likely to see the early benefits of rising rates start to impact these companies' income statements during this current earnings season. Look for management discussions about the projected impact of rising rates on these businesses. Though these stocks have started to benefit from this expected tailwind, considerable concern remains once interest rates begin to move materially higher.
P.S. In our latest research, "Top 10 Stocks For 2014," we've uncovered several more investments that are similar to ADP. They dominate their markets, pay increasing dividends, and repurchase billions in stock. To learn more about these ideas, including several names and ticker symbols, click here.
- David Sterman
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