Since the end of April, the 10-year Treasury note yield increased more than 40 basis points and is up 35 basis points year-to-date. The financial services analysts at UBS A.G. (NYSE: UBS) have looked at both the fundamental benefits of higher interest rates and how investor sentiment would be affected by rising rates. They then scanned their universe of financial services stocks that could benefit most from the rise. They came to the conclusion that life insurers and e-broker stocks may provide the best return for investors.
The UBS team broke down the report with companies that would benefit most from rising long-term rates and rising short-term rates. Here are their stocks to buy based on those two scenarios.
Rising short-term rate stocks to buy:
TD Ameritrade Holding Corp. (NYSE: AMTD) is a top e-broker on the UBS list to buy. TD Ameritrade provides securities brokerage services and technology-based financial services to retail investors, traders and independent registered investment advisors in the United States. UBS has a $18 price objective for the stock. The Thomson/First Call consensus target is at $20. Shareholders are paid a 1.5% dividend.
Charles Schwab Corp. (NYSE: SCHW) had revenue growth that came in higher than the industry average of 6.3%. Since the same quarter one year prior, revenues increased by 7.9%. UBS has a $20 price objective, while the consensus for the stock is at $17. Investors receive a 1.2% dividend.
Bank of New York Mellon Corp. (NYSE: BK) is set up well for a rise in short rates. Warren Buffett has continued to add this stock to his portfolio of banks. UBS has set a $28 target, and the consensus sits just above at $28.50. Shareholders are paid a 2,0% dividend.
Morgan Stanley (NYSE: MS) is a bulge bracket competitor poised to do well in the rising short rate scenario. The company has begun expanding its Australian presence with an investment from its $4 billion global infrastructure fund. UBS has a $23 target, and the consensus target is higher at $25. Investors are paid a tiny 0.8% dividend.
Comerica Inc. (NYSE: CMA) has built itself into the largest commercial bank headquartered in the booming state of Texas. In addition to 136 banking centers in Dallas/Fort Worth, Houston, Austin, San Antonio and Kerrville regions of Texas, Comerica Bank locations can be found in Arizona, California, Florida and Michigan. UBS has a $42 price target for the stock, and the consensus is lower at $36. Investors are paid a 1.7% dividend.
Rising long-term rates stocks to buy:
Lincoln National Corp. (NYSE: LNC) is a top stock to buy on this side of the interest rate fence. The stock continues to trade at the low end of the valuation spectrum at levels close to 0.7 times book value. UBS has a $37 price objective, while the consensus is lower at $36. Investors are paid a 1.3% dividend.
MetLife Inc. (NYSE: MET) is another top insurance name on the UBS stocks to buy list. Strong gains in the book value per share during the past six months have kept the stocks multiple significantly below historical multiples. UBS has placed a $45 target on the stock. The consensus estimate is at $48. Investors receive a tidy 2.5% dividend.
Unum Group (NYSE: UNM) has recently been hitting 52-week highs. The company also raised its dividend 11.5% last week. UBS has a $31 target, but the consensus is lower at $30.50. Investors are paid a 1.8% dividend.
Historically, the stocks in most of the industries within the financial services sector have demonstrated moderately strong, positive correlations with U.S. Treasury yields. This could prove positive for investors that add stocks to their portfolios that benefit from both long and short rate movement.