In the wake of the Federal Reserve unveiling its monetary policy roadmap, investors are keenly examining which stocks to buy that stand to benefit. The Fed’s depiction was largely positive, though the anticipation of one more rate hike before year-end provides food for thought.
It might be prudent for investors to brace for a prolonged high interest rate atmosphere, potentially lasting through 2024. This conservative stance ensures that should the Fed navigate to a “soft landing” and simultaneously mitigate inflation, the outcome would exceed expectations.
Further, gravitating towards stocks that are favorably poised in the face of rising interest rates often implies a tilt towards inherently robust companies. So even if rates were to retreat, these stocks, bolstered by their inherent stability, could shield investors from drastic downturns.
Keeping the Fed interest rate decision in perspective, here are some compelling stocks to buy.
Stocks to Buy: Costco (COST)
A Costco Wholesale (COST) warehouse in Auburn Hills, Michigan.
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Quite frankly, warehouse-style retailer Costco (NASDAQ:COST) makes for a relatively easy case for stocks to buy on the Fed interest rate decision. As policymakers have stated previously, while disinflationary trends may be encouraging, consumer prices remain stubbornly elevated. Therefore, households will still be looking to secure discounts, which bodes well for COST.
Of course, what makes Costco stand out even more is that it’s a membership-only enterprise. As well, Costco caters to a higher income segment compared to other big-box retailers. Thus, COST should be relatively insulated from various economic pressures.
To be fair, COST does come at a forward earnings premium of 36.45x, which is steep. However, with that price, you get a predictable business and a relatively robust balance sheet. Analysts peg COST as a strong buy with a $588.39 price target, implying a bit over 5% upside potential. The high-side target is $651, suggesting almost 17% growth.
Ares Capital (ARCC)
Ares Capital (ARCC) logo on its webpage
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A leading specialty finance firm, Ares Capital (NASDAQ:ARCC) is a business development company (BDC). This is a type of investment vehicle that aims to facilitate capital access for small and mid-sized businesses. Enterprises that take up the services of BDCs generally are too small to receive capital from larger financial institutions.
Now, with that said, Ares presents a significant risk for stocks to buy on the Fed interest rate decision. Should the central bank continue to lift rates in 2024, a soft landing might not materialize. Instead, the metaphorical airplane might scare some passengers before they finally disembark.
Still, it’s also possible that if the economy still trudges forward somewhat, small businesses will have little choice but to use BDCs like Ares. Thus, speculative investors should keep ARCC on their radar. Lastly, analysts peg ARCC as a consensus moderate buy with a $20.75 average price target, implying nearly 8% upside.
Stocks to Buy: Procter & Gamble (PG)
Procter & Gamble Union Distribution Center. P&G is an American Multinational Consumer Goods Company
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A consumer goods giant, Procter & Gamble (NYSE:PG) is a classic case for stocks to buy on the Fed interest rate decision. Basically, no matter what happens in the economy, people will need to buy P&G products. Therefore, the business enjoys a level of predictability that other enterprises can only dream about.
To be sure, there’s no such thing as a free lunch. By targeting predictability, investors end up giving away potentiality. Still, if the Fed raises interest rates again before year’s end and if unforeseen circumstances materialize in 2024, investors will be happy to have P&G in their portfolios.
Looking at its financials, few would mistake it as a remarkable profile. Still, true to form, the consumer goods firm is consistently profitable, in part thanks to its robust net margin of nearly 18%. In closing, analysts peg PG as a consensus moderate buy with a $169.50 price target, implying nearly 12% upside potential.
Sempra Energy (SRE)
The logo for Sempra (SRE) is seen at the top of an office building.
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While I’ve been hammering home the idea of Sempra Energy (NYSE:SRE) as one of the stocks to buy, the reality is that few utilities offer as compelling an opportunity. For one thing, we must consider location, location, location. Headquartered in San Diego, California, Sempra couldn’t ask for a more economically viable and desirable market to serve.
Sure, political editorials love to wax poetic about people leaving California for “freedom” and whatnot. However, the desirability of the Golden State makes SRE a strong wager for the Fed interest rate decision. Basically, no matter where monetary policy goes, people still have to pay their utility bills. With Sempra, you have the knowledge that this user base is relatively well off.
As you’d expect from a utility, SRE doesn’t really enjoy sterling financials. However, the main takeaway is that it’s consistently profitable. Finally, analysts peg SRE as a moderate buy with an $82.15 target, implying over 14% growth.
Stocks to Buy: Mastercard (MA)
Close up of a pile of mastercard credit load debit bank cards.
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I’m not going to lie: Mastercard (NYSE:MA) is a tough idea to stomach for stocks to buy on the Fed interest rate decision. At first glance, the narrative makes plenty of sense. With economic conditions worsening, consumers may be forced to use plastic to make ends meet. Further, higher interest rates translate to greater profitability for lenders.
However, you can only push this thesis so much before it becomes very questionable. Much of the viability of Mastercard will depend on whether the central bank truly engineers a soft landing. Otherwise, MA could be problematic.
Then again, the underlying company enjoys relatively solid financials if you ignore its rich earnings premium. Commanding solid revenue growth and robust profit margins, Mastercard just might be able to offer an enticing idea for investors.
Analysts certainly like it, rating MA a consensus strong buy. Their average price target comes in at $466.18, implying 16% upside potential.
MetLife (MET)
Man in suit with hands over paper cutouts of family, car and home. Represents insurance.
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One of the largest global providers of insurance, MetLife (NYSE:MET) is a fundamentally boring enterprise. Nevertheless, if you’re looking for stocks to buy based on the Fed interest rate decision, boring is good. As with the other ideas on this list, MetLife offers a relatively predictable business. Also, the Covid-19 crisis may have sparked a cynical tailwind.
Basically, we now know that anything can happen, even in the developed world. Therefore, the pandemic reinforced the idea of future planning. In addition to insurance products, MetLife specializes in annuities and employee benefit programs, with over 90 million customers in over 60 countries.
To be fair, MetLife doesn’t exactly offer the best financial profile. However, prospective investors should note that MET trades at a forward multiple of 7.02x, below the sector median of 9.73x. Most conspicuously, analysts peg MET as a unanimous strong buy among 10 expert voices. The average price target lands at $78.60, implying 22% upside potential.
Five Below (FIVE)
storefront of a five below
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While the underlying narrative for discount retailer Five Below (NASDAQ:FIVE) is compelling for easily discernible reasons, it’s also risky. Since the beginning of the year, FIVE has given up 14% of its equity value. What’s more worrying, FIVE slipped 21% just in the trailing month alone. So, what happened to these no-brainer entities for tricky economic situations?
Five Below isn’t the only name in the discount retail space that’s hurting. Most notably, Dollar General (NYSE:DG) has been in free fall, losing 56% since the January opener. For the pure-play dollar store, the gross margin erosion paints an ironic picture: the discounts are hurting the discount retailer.
However, in Five Below’s case, its gross margins are improving (albeit slightly) while seeing increased revenue growth. It’s in a much better financial situation, which isn’t surprising given the more appealing reputation of the brand. On a final note, analysts peg FIVE a strong buy with a $212.87 target, implying 44% upside.
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. Tweet him at @EnomotoMedia.
