It is conventional wisdom that rising interest rates are bad for the stock market, and there is no denying that in 2022 most stock prices fell as interest rates shot up. But John Buckingham, editor of The Prudent Speculator newsletter, points out that periods of rising interest rates are more often correlated with good performance for stocks — especially value stocks.
In a report on Feb. 14, Buckingham listed “10 inexpensive and generous yielding stocks” that have “buy” ratings from The Prudent Speculator. They are listed below, with his comments about each company.
Value stocks are generally those of mature companies with relatively stable businesses that trade at lower valuations to earnings than growth stocks do. They also tend to pay dividends.
Markets took a hit in 2022 as the Fed rapidly moved interest rates higher in a bid to contain inflation. We are still in rate-increase mode, but from a higher base. The stock market is taking it in stride, with the S&P 500
increasing 7% so far this year. (All investment returns in this article include reinvested dividends.)
The Prudent Speculator (TPS) is published by Kovitz Investment Group of Chicago, and its core strategy, as directed by Buckingham, has the top performance ranking among newsletters for 30 years through Jan. 31 at the Hulbert Financial Digest. For that period, the TPS portfolio’s average annual return has been 14.02%, compared with an average return of 9.84% (with dividends reinvested monthly), according to Mark Hulbert.
According to Buckingham, an analysis of 50 years of stock-market and interest-rate data shows that “stocks are generally indifferent about the interest rate environment.” In the Feb. 14 report, TPS included this chart, summarizing excess returns above risk-free rates during months of rising or falling interest rates. Those are returns in excess of what people earn on money kept in cash. A year ago, the federal-funds rate was still locked in a target range of zero to 0.25%. The range is now 4.50% to 4.75%. This provides an idea of how risk-free returns can fluctuate.
10 value stock picks
Buckingham shared this list of 10 stocks, all with dividend yields above 2% that are held in TPS portfolios that he believes are bargain-priced. They are in alphabetical order:
|Company||Ticker||Industry||Dividend yield||Forward P/E||10-year average P/E|
|Civitas Resources Inc.||
|M.D.C. Holdings Inc.||
|Tyson Foods Inc. Class A||
||Food: Meat/ Fish/ Dairy||3.16%||12.6||11.8|
|Verizon Communications Inc.||
Click on the tickers for more about each company.
Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
For eight of the 10 stocks on the list, current forward price-to-earnings ratios are well below their average forward P/E ratios over the past 10 years. The S&P 500’s weighted forward P/E is 18.4, which is above its 10-year average of 17.4.
In an email exchange, Bucking provided some thoughts about the 10 companies. He believes all are generating sufficient cash flow to support their regular dividend payouts. Here are his comments about the group, with other information:
produces a variety of materials used in manufacturing. Buckingham noted its “cost advantage” in many markets, along with an ability “to push through” regular price increases. He likes the company’s exposure to growth markets, including electric vehicles and the 5G build-out.
The dividend yield for Civitas Resources Inc.
is based on its “base” quarterly dividend of 50 cents a share. The company also pays a variable quarterly dividend, which was $1.45 a share for the fourth quarter. Buckingham pointed to safety factors for the stock in the event of an oil-price collapse, including “a clean balance sheet.”
of Dallas is especially sensitive to rising interest rates because more than half of its loans are non-real estate commercial loans that tend to be roll over quickly to higher interest rates. The bank’s net interest margin (the annualized spread between its average yield on loans and investments and its average cost for deposits and borrowings) improved to 3.74% in the fourth quarter from 2.04% a year earlier. “Even as deposits become more competitive, Comerica still has plenty of lending capacity as current loans represent just 75% of current deposits,” Buckingham wrote.
He sees “many challenges to work through” for Kohl’s Corp.
but also believes the shares are “very inexpensive while investors with a longer-term view might find that Kohl’s has many opportunities to be successful,” whether it continues to operate independently or is acquired “through a corporate action that could include monetizing its substantial real estate holdings.”
A stubbornly low unemployment rate, combined with layoffs of higher-salaried employees in several industries, presents a set of challenges to a provider of temporary staffing, such as ManpowerGroup Inc.
The stock has fallen 19% over the past year, while the S&P 500 is down 5%. Buckingham looks past the current market, noting the company has “weathered many crises over its 70-plus-year history, while its solid financial footing has allowed it to continue to make acquisitions, pay dividends and buy back stock along the way.”
A sharp increase in mortgage loan rates has changed the scene for home builders. But there is still a housing shortage in the U.S. and rents are high. So Buckingham believes analysts’ cuts to earnings estimates for M.D.C. Holdings Inc.
for 2024 and 2025 have been “overly pessimistic,” even as they predict continued profitability. “Of course, management has always run the company conservatively [and] the balance sheet is solid,” Buckingham wrote.
For Pfizer Inc.
near-term challenges include slowing sales for Covid-19 vaccines and rising R&D and sales expenses “to support the launch of 19 new drugs and indications over the next 18 months,” according to Buckingham. But he added that there is “a lot to like” about Pfizer longer-term, including “the north of $30 billion of cash to support its promising drug pipeline and the billions of dollars still to be earned in the years ahead from its Covid vaccines and therapeutics.”
Buckingham expects the “bumpy ride” to continue for the semiconductor industry, but he also believes Qualcomm Inc.’s
profitability is “likely to remain robust, with the bottom line eventually seeing renewed growth as margins improve, supply chains stabilize and the Chinese handset market further matures.”
Buckingham expects the recent “perfect storm” for Tyson Foods Inc.
including disappointing quarterly results and the arrest of its chief financial officer John Tyson, not to be repeated. He pointed to a recovery for the shares; he believes the company’s profits are nearing a “trough” and that “a continued focus on streamlining operations to pay off, normalizing margins and leading to a substantially improved bottom line over the ensuing years.”
focus on delivering content rather than creating it, “has resulted in a network that is highly attractive to all types of internet and telecom service subscribers,” Buckingham wrote. He expects some “pressure” as the company continues to invest in 5G, but believes these efforts will be worth it, as they “perpetuate the delivery of consistent, quality results.