5 Low-Debt Stocks to Brave the Impact of Rate Hike

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U.S. Federal Reserve is widely expected to raise the key interest rate in the Federal Reserve's Open Market Committee (FOMC) meeting on Sep 16-17. It is also being speculated that the central bank will increase the rate by 0.25% in September and 0.5% in December.

Interest rate is a key instrument that Fed regulates to control U.S. economic growth. Fed last hiked interest rate (also called federal funds rate) by 25 basis points (bps) to 5.25% in Jun 2006. However, financial crisis compelled Fed to lower the rate to near zero level in Dec 2008.

Interest Rate: Double-Edged Sword

Fed presently believes that a slight increase in interest rates will not be detrimental to the economy. Moreover, a rate hike will help it to check the possibility of inflation, resulting from increasing wage rates. However, this presumption has met some resistance as experts believe that year-to-date wage growth rates are quite modest.

Some experts opine that aggressive rate hikes can result in deflation that will again compel Fed to lower rates. Maintaining her cautious stance, IMF Chief Christine Lagarde recently said that, "The U.S. Federal Reserve should not rush its decision to raise interest rates and should move only when it is sure the decision is unlikely to be reversed later."

Meanwhile, the recent turmoil in China, global stock market volatility, falling oil prices and plunging commodity prices have called Fed's rate hike timing into question. However, the recent job market reports that throw light on the addition of 173K jobs in August might lend Fed enough confidence to go ahead with the schedule.

Impact of Rate Hike on Sectors

Financial institutions like banks primarily benefit from a rate hike, as it increases their net interest spread - the difference between their borrowing and lending rates. Meanwhile, insurers profit from a rate hike as the difference between their investment income and claim payments increases.

Rate hike is expected to push mortgage interest rates up, making loans expensive. This is expected to hurt demand for new homes. However, reasonable rate hike will keep housing affordable. Reducing housing price gains, easing credit availability, improving consumer confidence and better purchasing power amid an improving economy will keep the housing market momentum alive.

Moreover, Fed's rate hike will reflect an improvement in the economy which will in turn boost consumer confidence. This coupled with low gasoline prices will result in higher spending which will certainly benefit the Consumer Discretionary sector.

Meanwhile, rate hike is likely to have a mixed impact on the Technology and Healthcare space. We believe that companies with low debt levels and strong cash flow generation capabilities in these sectors will thrive post the rate hike.

On the flip side, capital intensive sectors like Energy and Utility will be dealt a heavy blow by a rate hike as the cost of borrowing will increase significantly. Lower oil prices will continue to hurt top-line growth of Energy companies, which coupled with an increasing rate, will dent profits.

Nevertheless, if Fed decides to raise interest rate in September, we believe companies with low debt levels are the best picks for investors.

5 Stocks to Consider Ahead of Rate Hike

Choosing the right stock with a solid growth potential can be a momentous task which has been simplified by our style score system .

Our Growth Style Score condenses all the essential metrics from the company's financial statements to get a true sense of the quality and sustainability of its growth. Our research shows that stocks with Growth Style Scores of 'A' or 'B' and a Zacks Rank #1 (Strong Buy) or #2 (Buy) offer the best investment opportunities in the growth investing space.

All the five stocks presented herein flaunt a Zacks Rank #1, a Growth Style Score of 'A' and a Debt/Equity ratio substantially lower than their respective industry averages.

SolarEdge Technologies Inc. SEDG - Herziliya Pituach, Israel-based SolarEdge offers proprietary Direct Current (DC) optimized inverter systems that maximize power generation at the individual PV module level.

SolarEdge has a Debt/Equity ratio of 0.01.

Comfort Systems USA Inc. FIX - Houston, TX-based Comfort Systems provides heating, ventilation and air conditioning (HVAC) installation, maintenance, repair and replacement services.

Comfort Systems has a Debt/Equity ratio of 0.06.

Universal Insurance Holdings Inc. UVE - Fort Lauderdale, FL-based Universal Insurance operates through its wholly owned subsidiaries, Universal Property & Casualty Insurance Company (UPCIC) and American Platinum Property and Casualty Insurance Company (APPCIC).

Universal Insurance's Debt/Equity ratio is 0.10.

Regeneron Pharmaceuticals, Inc. REGN - This Tarrytown, NY-based biopharmaceutical company offers medicines for eye diseases, high LDL cholesterol and a rare inflammatory condition.

Regeneron has a Debt/Equity ratio of 0.12.

Lawson Products Inc. LAWS - Chicago, IL-based Lawson's products cater to the industrial, commercial, institutional and government maintenance, repair and operations (MRO) market.

Lawson Products has a Debt/Equity ratio of 0.14.


Whatever may be the timing of Fed's rate hike, we believe that these 5 low-debt stocks are great picks for a winning portfolio.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

REGENERON PHARM (REGN): Free Stock Analysis Report

LAWSON PRODUCTS (LAWS): Free Stock Analysis Report

COMFORT SYSTEMS (FIX): Free Stock Analysis Report

UNIVL INSUR HLD (UVE): Free Stock Analysis Report

SOLAREDGE TECH (SEDG): 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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