7 Stocks That Win When the Fed Hikes Interest Rates

Stocks to buy

As the saying goes, past is not prologue. That simply means that what happened in the past doesn’t fully predict what will occur in the future. But when it comes to the stock market, there’s strong data to suggest that when the Fed hikes interest rates, certain sectors fare much better than others.  Therefore, investors would be wise to focus on those sectors when picking stocks to buy. 

The data, compiled by Charles Schwab, indicates that six sectors, including communication services, energy, financials, healthcare, information technology, and utilities, outperform the stock market following rate hikes. 

So one strategy would simply be to find strong performers from each of those sectors and buy the shares of those stocks. I’ll identify such stocks in this column.

CTRA Coterra Energy $30.20
MSFT Microsoft $290.50
V Visa $214.90
MA Mastercard $357.07
JNJ Johnson & Johnson $166.30
TMUS T-Mobile US $146.23
DUK Duke Energy $112.35

Coterra Energy (CTRA)

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Energy stocks tend to perform very strongly following rate hikes. That means that Coterra Energy (NYSE:CTRA) could be one of the best stocks to buy now. The Houston-based E&P firm identifies and develops onshore oil and gas properties in the U.S. 

The company derives most of its revenue from strategic oil resources in the Permian Basin which is located in Texas and New Mexico. Coterra controls 234,000 acres in the basin and ended 2021 with 514 million barrels of oil equivalent there. 

The firm controls 177,000 acres of natural gas in the Marcellus Shale deposit, and it ended 2021 with 2,174 million barrels of oil equivalent in that territory. It also owns 182,000 acres in the Anadarko Basin. 

The company is having a great 2022, and its net income reached $1.229 billion this quarter, up from $30 million during the same period a year earlier. Oil prices are declining, but Coterra is still benefiting from strong energy markets due to the ongoing war in Ukraine. 

Microsoft (MSFT)

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Microsoft (NASDAQ:MSFT) is among the best information tech names. The Schwab report, referenced in the introduction of this column, indicates that the IT sector has historically beaten the market following Fed rate hikes.

Right now is a good time to consider adding Microsoft to your portfolio as the firm gets leaner and meaner in the midst of the rate hikes. In other words, Microsoft will probably seek to become more efficient in the coming weeks and months. 

Indeed, Microsoft is already looking to reduce its budget as a means of coping with inflation. 

MSFT reported its slowest sales growth in two years last quarter. That might sound bad, but its  sales still increased 12% YOY in Q2. 

Visa (V)

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Visa (NYSE:V) is one of the better financial stocks to buy as travel booms. Visa’s revenue increases as the payments volumes of its credit cards climb, so when travel declines, its business suffers. 

Unsurprisingly, Visa did very well in Q3 amid the travel boom. Visa’s overall payment volume increased by 12% YOY, and the value of its processed transactions rose 16% YOY. The company also benefited from a significant spike in its cross-border volume, which increased by 40%. 

As a result of those volume increases, its overall revenue climbed 19% YOY. That 19% increase, in turn, led to a 32% increase in its net income. 

Investors should understand that the Fed’s interest-rate hikes have a trickle-down effect. So Visa will be charging higher fees, causing its revenues, net income, and overall business to continue to boom. 

MasterCard (MA)

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MasterCard (NYSE:MA)  is another good  financial stock to buy right now. It should be noted that financial stocks have historically outperformed the market by 2.5% in the years following the initiation of a cycle of rate hikes. 

MasterCard’s management  says that the firm’s strong results indicate that American consumers, as a whole, are financially healthy. The company’s sales reached $5.5 billion last quarter, eclipsing the $5.3 billion Wall Street was expecting. 

Those results also show that the balances of its credit cards  increased  13% YOY to $46 billion in Q2. The 13% increase was the largest such gain in more than 20 years. Whether that illustrates a “strong consumer” or not is highly debatable. But what it does mean is that the value of MA stock  should rise as Americans take on increasing levels of debt. 

Johnson & Johnson (JNJ)

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Johnson & Johnson (NYSE:JNJ) is a healthcare stock that usually performs well no matter how the stock market is performing. So JNJ is a good stock to buy regardless of what the Fed happens to be doing. But given that healthcare stocks tend to do roughly 2% better than the stock market in a rising rate environment, buying JNJ stock makes sense currently. 

Investors need only to look at the company’s price chart over the last few years to understand JNJ’s steady nature. Those who do will find that it only dropped dramatically during the onset of the pandemic. In other words, only  a black-0swan event will cause its price to tumble. And even in 2020,  it rebounded quite quickly. 

Investors might mistakenly believe that with the brunt of the pandemic behind us, JNJ stock could falter because its Covid-19 vaccine padded its financial results. But the drug maker’s revenues reached $93.77 billion in 2021, and they’re expected to exceed $95 billion this year and come in at roughly $99 billion in 2023. 

T-Mobile US (TMUS)

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T-Mobile US (NYSE:TMUS) is in the communication services sector. Communication services is a sector that does 1.5% better than the overall market during Fed rate hikes. 

Investors will be encouraged by the fact that analysts, on average, expect TMUS stock to gain approximately 20% over roughly the next 12 months. 

Investors should consider TMUS stock because it has a reasonable chance of success in the current environment due to its presence in the communication services sector. Moreover, T-Mobile is sending strong, positive signals to the market as it raises its full-year guidance. 

Deutsche Telekom (OTC:DTEGY) has a nearly 50% stake in T-Mobile. The German company has promised to raise its stake above 50%.  When that happens there is a good chance that the company will carry out stock buybacks.

Duke Energy (DUK)

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Utilities traditionally perform well when the Fed raises rates. Consequently, Duke Energy (NYSE:DUK) stock looks strong. 

But Duke Energy is not just on this list because it’s a notable utility. Rather, I included it in this column because Duke Energy represents the best value among familiar names in the utility sector. 

 Duke’s price-earnings ratio is very close to its 10-year median. Southern Co. (NYSE:SO) and Dominion Energy (NYSE:D), on the other hand, both have P/E ratios that are well above their 10-year medians. 

That strongly suggests that investors should flock into DUK stock if and when they are looking for a utility stock with an attractive valuation. 

On the date of publication, Alex Sirois 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.

Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks.Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.

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