First off, isn’t it great to buy a house these days with such low interest rates? Our parents paid upwards of 14% back in the 80s for a mortgage and we are paying something like 3-4% nowadays. Because interest rates are so low, it has downstream effects. It’s great for home buyers to afford a lower monthly payment without paying too much interest on the loan. The economy has been stimulated over the past 4 years providing a tremendous bull market leaving stocks at record highs. How do you think this impacts banks and financial institutions?
Low interest rate environments are great for consumers, but not that great for financials. Even though the banks have risen quite substantially over the past 5 years, they still have more room to grow. Take Wells Fargo (WFC) in the chart below for example.
The stock has more than doubled since 2010 where it traded around 25.00 per share to over 57.00 in June 2015 with a dividend over 2.5%. That’s not bad at all. Let’s review.
- WFC financials are solid sporting a 12.72 forward P/E (vs. the overall market of 19+), meaning it’s not an expensive stock today despite the success
- It’s a value play with projected EPS growth (8.18%) below their forward P/E (12.72)
- Debt / Equity is just above 1 at 1.1 – which isn’t bad at all for a company that loans money consistently
- I like their Price to Book value of 1.77 (over 1 is the sign you want to see) as it ties in nicely with being undervalued with paying a good dividend of 2.62%
What I’m getting at here is not a recommendation for Wells Fargo, but more of a recommendation of Financials going forward and how to make money off rising interest rates. Financial institutions like Wells Fargo, Citigroup, and Bank of America make money on the spread (interest collected on top of the loan). Since interest rates are historically low, they aren’t making as much profit due to such a small spread on lending money.
Since I love to spread out my risk with diversification combined with low cost ETF providers like Vanguard and Fidelity, that’s where my recommendation is heading. Fidelity offers a free ETF brokerage account as long as the ETFs are iShares on their platform. Fidelity has a ETF called FNCL that does just that. It’s an ETF with a basket of financial stocks with all the names I mentioned above. The fund has a dividend yield of 1.89%, very stable & slow growth in less than 2 years since the fund’s inception in October 2013. In the last Fed Reserve minutes, they hinted that rate hikes should be starting in September 2015 followed by more in the future.
Take advantage of a very stable investment that has the following attributes –
- Lame duck president over the next 18 months (generally causes unrest in the stock market)
- Interest rates rising
- An array of diversification
- A healthy dividend
- Projected stable growth ahead
Fidelity’s platform will help you avoid fees (that cuts in to your principal) and will allow you to add a full position over the next 12-18 months. A full position means that if you wanted to invest $5,000, to invest about $420 per month over a 12 month period of time ($5,000/12=$416) instead of all at once. This will allow you to buy it when it fluctuates over time, also known as dollar cost averaging.
Please feel free to let me know any feedback!
Alex Richwagen is an investment research analyst. Any of his recommendations are that of Mr. Richwagen, the information presented by him is the opinion of his research. All investment decisions are your choice and should be based on your own analysis.