Although it might seem like the Federal Reserve will eventually look to reduce interest rates, the opposite might be true, thus necessitating a discussion about stocks to buy before rate hike. Fundamentally, all eyes center on the jobs report. Last May, the economy added 339,000 jobs, well above the consensus target of 190,000. On paper, this print sounds incredibly favorable for the broader sentiment. However, it also means that more dollars chase after fewer goods, which is inflationary. Therefore, high-potential stocks before a rate hike might outperform in the long run.
In addition, the real M2 money stock – while falling sharply against its peak – continues to be elevated relative to pre-pandemic norms. Put another way, there’s still plenty of money floating around due to Covid-19-related stimulus and support programs. The Fed has to address this matter. Otherwise, inflation may run indefinitely hot, which then bolsters stocks to buy pre-Fed decisions.
Of course, both individual Americans and policymakers prefer kicking the can down the road. That’s one of the main risk factors here. Nevertheless, economic stability is at risk, the central bank must get serious. On that note, below are stocks to invest in before Fed rate hikes.
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Generally speaking, a large swathe of market sectors tends to respond well to falling interest rates. Basically, this framework implies expansion at a lower cost. However, if you anticipate the opposite trajectory, utility giant Duke Energy (NYSE:DUK) represents one of the best stocks to buy before rate hike. Cynically, that’s because rate hike or not, customers will need to pay their utility bills.
Put another way, DUK ranks among the stocks to buy pre-Fed decision because it enjoys a natural monopoly. Due to the steep barrier to entry of the utilities sector, prospective competitors don’t even bother trying. Therefore, it gives Duke breathing room.
Sure enough, like other utility plays, Duke doesn’t enjoy the most sterling financials. However, it does deliver consistent profitability, again because people have little choice but to pay up. That’s why it’s one of the high-potential stocks before rate hike.
Finally, Wall Street analysts peg DUK as a consensus moderate buy. Their average price target lands at $105.30, implying nearly 16% upside potential.
Mercury General (MCY)
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Headquartered in Los Angeles, California, Mercury General (NYSE:MCY) and its subsidiaries represent a multiple-line insurance organization. Predominantly, according to its public profile, Mercury offers personal automobile and homeowners insurance through a network of independent producers in many states. As well, it offers renters and business insurance. Since the January opener, MCY slipped over 10%.
Despite the red ink, MCY should be one of the top stocks to buy before Fed action. While Mercury doesn’t quite have a natural monopoly, it benefits from a hostage or captive audience. For example, most states in the U.S. require some form of auto insurance. With relatively few trusted players in the game, Mercury enjoys a large, realistically addressable market. For full transparency, the company’s major drawback is its financials. While insurance companies also don’t distinguish themselves usually in this field, Mercury appears particularly challenged.
That said, Raymond James analyst Charles Peters pegs MCY a buy with a $40 price target. If it gets there, we’re talking about nearly 30% growth potential. Thus, it’s one of the stocks to invest in before Fed rate hikes.
M&T Bank (MTB)
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Easily the riskiest stocks to buy before rate hike on this list, M&T Bank (NYSE:MTB) inherently suffers a credibility cloud. A bank holding firm, M&T operates over a thousand branches in 12 states across the eastern U.S. Its footprint extends from Maine to Southern Virginia. In other words, it’s a regional banking firm, which of course poses risks.
On one hand, three regional banks failed this year. Plus, the first two failures temporarily sparked panic though the federal government responded quickly to the crisis. However, it’s important to realize that while the mainstream media hasn’t focused on the story as much, the crisis itself isn’t over. One of the concerns is that future shocks – such as deteriorating commercial real estate – could disproportionately impact smaller entities.
However, M&T ranks among the larger regional institutions. In addition, a possible combination of economic stability and higher rates could help lift its profitability. Lastly, analysts peg MTB as a consensus moderate buy. Their average price target stands at $152.63, implying 25% upside potential. Therefore, we could be looking at one of the high-potential stocks before rate hike.
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.
