Bank of America flags rate-hike winners in Russell 2000 as higher yields reshape stock strategy

Traders Union
All News
Financial News
Rate-hike winners in Russell 2000

Highlights

Bank of America expects two more 25 basis point Fed rate hikes this year after the recent increase brought the target range to 3.75%–4%.
Madison Square Garden Entertainment has gained over 45% year-to-date, driven by strong cash flow and a buy rating from Bank of America analysts.
First Bancorp shares are up 30% in 2023, with banks generally benefiting from higher rates, while Peloton outperforms on free cash flow despite a 20% year-to-date decline.

Russell 2000 picks tied to rate-hike resilience

As reported by CNBC, Bank of America says investors should revisit equity positioning after the Federal Reserve raised rates by 25 basis points, its first increase in more than three years, taking the overnight funds rate to a target range of 3.75% to 4%. The bank expects two more 25 basis point hikes this year and argues that rising yields are changing the relative appeal of stocks versus bonds.

Bank of America says quality stocks, defined by strong balance sheets and consistent cash flow, and value stocks, which trade at lower valuations while temporarily out of favor, have been the best-performing groups in the Russell 2000 during prior Fed hiking cycles. The bank says quality stocks should continue to lead because more Fed tightening remains likely, while value stocks could gain momentum as profits grow.

Its screen of Russell 2000 names includes Madison Square Garden Entertainment, Peloton and Puerto Rico-based First Bancorp. Bank of America says these companies have shown they can generate solid revenue, earnings and cash flow despite the pressure that higher interest rates place on business activity and financing conditions.

Higher yields shift sector and company outlooks

Long-term U.S. yields have risen to nearly 20-year highs, with the benchmark 10-year Treasury jumping more than 14 basis points to 5.116% on Wednesday, its largest one-day move in nearly 18 months. The move reflects hawkish Federal Reserve commentary, elevated oil prices and resilient economic activity, all of which reinforce pressure on equities as investors can shift toward higher-yielding and relatively lower-risk bonds.

Within Bank of America's stock list, Madison Square Garden Entertainment stands out for strong cash flow returns, while analysts carry a buy rating on the shares. The stock has climbed more than 45% so far this year.

First Bancorp also screens well for a hiking cycle because banks typically benefit when rates rise, as they can earn more on loans. The broader financial sector can also gain from higher borrowing costs through mortgages, auto loans and business lending, and First Bancorp shares have advanced 30% so far this year.

Peloton, meanwhile, ranks highly on free cash flow and return on invested capital, even as its shares have fallen more than 20% year to date. The connected fitness company is pursuing a turnaround that includes new treadmills, an AI-powered personal training assistant and added distribution channels, factors Bank of America says could support performance even in a tighter monetary backdrop.

In our earlier coverage of the Federal Reserve’s latest rate hike and its tightening bias, we highlighted Vice Chair Michael Barr’s view that further policy adjustments may be needed to bring inflation back toward the 2% target. We also noted how higher yields have pushed the 30-year fixed mortgage rate up to 7.12%, tightening home-financing conditions and adding pressure to housing activity through weaker refinancing and purchase demand.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.