4 Financial Stocks That Surged Ahead of the Fed Rate Hike

The Federal Reserve is all set to mark the end of its accommodative monetary policy on Dec 16 by raising the interest rate after keeping it near zero for about eight years. While the market is expecting an initial 25 basis point hike, it prepared positively for the historic move with the U.S. stock indices and bond yields moving higher in anticipation.

It has been observed historically that rate hikes boost stock returns. According to a Money and Markets article, "if we look at the last six Fed Funds rate tightening cycles, the S&P 500 Index posted above average gains of 9.8% on average nine months after the first Fed rate hike. That's well ahead of the average 9-month gain of 7.2% for all periods going back to 1983."

Therefore, the time seems to be right to reshuffle our portfolios and include stocks that tend to benefit from the interest rate hike. While Technology and Consumer Discretionary have historically shown strong positive correlation to interest rates, let us focus on the Finance sector that thrives in a rising interest rate environment.

Why Finance Sector Is a Good Bet

Banks and other non-banking financial institutions like insurance companies, asset managers and brokerage firms tend to benefit handsomely at times of surging interest rates. For banks, borrowers taking up money have to pay higher interest rates under such circumstances, which in turn elevates income.

The likely interest rates hike, though at a slower pace, will ease some pressure on net interest margin (NIM) - a key source of banks' earnings. Also, banks will earn more from the money that they need to keep at the Fed compared with almost no income from this source in a near-zero rate environment that has prevailed since the last financial meltdown. Moreover, as a rising interest rate depicts a healthier version of an economy's growth, there will be lesser non-performing assets for the banks.

Insurance companies invest majority of the premium income received from policyholders in government and corporate bonds to earn investment income. They utilize this investment income in meeting their future commitments to policy holders. The potential rise in rates will allow the insurance firms to invest their new premium income in higher yielding securities, thereby leading to higher future returns.

With a rise in rates, brokerage firms are likely to engage in more investment activity. Brokerage firms earn interest income on un-invested cash in customer accounts. The rise in rates will allow the brokerage firms to invest at higher rates.

Further, asset managers can position themselves favorably with the rise in rates. In the fixed income sector, default rates are likely to decline and higher interest rates will enable reinvestment at higher yields, which ultimately will boost portfolio returns. The benefit can be achieved by positioning fixed income portfolios strategically through proper management of duration, diversification of sources of yield and maximize the reinvestment of income.

4 Financial Stocks to Bet On

South Carolina-based Carolina Financial CorporationCARO operates as the holding company for CresCom Bank that provides various traditional community banking services to individuals and businesses. This Zacks Rank #2 (Buy) company operates through three segments: Community Banking, Wholesale Mortgage Banking, and other.

Shares of Carolina Financial rose over 5% in the last week ahead of the anticipated increase in interest rates. The company's strong loan and deposit growth as well as excellent asset quality are expected to further benefit from the rate hike. Further, the company's projected EPS growth (F1/F0) of 69.1% signals continuation of an uptrend in the price chart in the near term.

Fox Chase Bancorp, Inc.FXCB , headquartered in Pennsylvania, is the mid-tier stock holding company of Fox Chase Bank, a federally chartered savings bank. The bank offers traditional banking services and products from its main office in Hatboro, Pennsylvania and other branch offices in Bucks, Montgomery, Chester, Delaware and Philadelphia Counties in Pennsylvania and Atlantic and Cape May Counties in New Jersey.

With a likely rise in interest rates along with continued execution of its commercial banking strategy, this Zacks Rank #1 (Strong Buy) company sees opportunities to grow despite the slow pace of economic expansion and increased competition. The company's stock gained nearly 8% in the past week and remains a good investment indicated by its projected EPS growth (F1/F0) of 21.1%.

Based in California, General Finance Corp.GFN , which is a specialty rental services company, provides portable storage, modular space, and liquid containment solutions in North America and Asia-Pacific regions. The company serves commercial, construction, transportation, industrial, energy, manufacturing, mining, retail, and education industries, as well as governments.

Though the Zacks Rank #1 company's earnings remain impacted by lower revenues in its workforce accommodation business, slower growth in the Australian economy and a declining Australian dollar relative to the U.S. dollar, an improving construction sector and continued growth in its New Zealand business along with its pursuit of strategic goals of geographic expansion and diversification outside the oil and gas sector continue to be the positives, thereby boosting growth.

The company's shares increased more than 20% in the last week ahead of the anticipated rise in interest rates by the Fed.

County Bancorp, Inc.ICBK , based in Wisconsin, is a bank holding company, which provides a range of consumer and commercial banking services to individuals, businesses, and industries. The basic services offered by the bank include demand interest bearing and noninterest bearing accounts, money market deposit accounts, NOW accounts, time deposits, remote merchant deposit capture, Internet banking, cash management services, safe deposit services, credit cards, debit cards, direct deposits, notary services, night depository, cashiers' checks, drive-in tellers, banking by mail, and the full range of consumer loans, both collateralized and uncollateralized.

Shares of this Zacks Rank #2 company gained nearly 8% in the past week. The company has been witnessing solid loan growth in the agricultural space as well as improving asset quality. Moreover, the company has been able to improve its net interest margin, which will further be boosted by a likely increase in interest rates. As part of its strategic focus, the company continues to seek talent in the business banking sector and evaluate acquisition opportunities.

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GENERAL FINANCE (GFN): Free Stock Analysis Report

FOX CHASE BANCP (FXCB): Free Stock Analysis Report

CAROLINA FIN CP (CARO): Free Stock Analysis Report

COUNTY BANCORP (ICBK): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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