After A Hawkish Yellen, These 4 Financial Stocks Are Best Buys

Fed Chairwoman Janet Yellen said that the case for hiking the federal funds rate has gained in strength in “recent months”, thanks to a solid labor market and a positive outlook on economic activity and inflation. Other Fed officials including her deputy, Fed Vice Chairman Stanley Fisher, also advocated a rate hike in the near term.

Fed’s Regional Bank Boards too backed a discount-rate increase, a clear indication that they favor a change in the main policy rate. Given such optimism, investing in financial stocks will be judicious as the possibility of a rate hike bodes well for these.

Yellen Sounds Hawkish at Jackson Hole

Yellen had sent a strong signal that the Fed is preparing to raise rates sooner than later. At the Jackson Hole economic symposium she said that concerns related to weak economic growth in the first half of the year and global turmoil have dissipated, mostly due to “solid” consumer outlays and a job market rebound following a slump in hiring in spring. July’s nonfarm payrolls had steered past analysts’ expectations by 255,000 job additions, following the upwardly revised 292,000 jobs created in June, according to the Labor Department (read more: 5 Stocks to Buy on Encouraging Employment Data).

Yellen also believes that inflation rising to the 2% target is very much possible over the next few years. Fisher had already mentioned that the Fed’s preferred price benchmark minus food and energy cost is at 1.6%, which is “within hailing distance of 2 percent”.

Several Officials Hint at Rate Hike this Fall

According to Fischer, Yellen’s speech was “consistent” with the likely two rate hikes this year. Also, Fed officials including New York Federal Reserve President William Dudley, Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams all sounded hawkish.

When asked whether the Fed should raise rates in its next meeting in September, Dudley said, “I think it’s possible.” He believes that economic growth in the second quarter will be stronger than the first quarter while the labor market will continue to tighten. Lockhart is admittedly confident of accelerating growth, and Williams too foresees another interest-rate hike “sooner rather than later”.

Fed’s Regional Bank Boards Wants Rate Hike

Last month, the boards of directors at 8 of the 12 regional Federal Reserve banks stressed on an increase in rates on direct loans to 1.25% from 1%. The Federal Reserve Bank directors said that economic activity continued to expand at a moderate pace, while “several directors cited improvements in the housing sector, as well as steady or increasing levels of consumer spending.”

Directors in Dallas, Philadelphia, Boston, Cleveland, Kansas City, Richmond, San Francisco and St. Louis are all in support of a rate hike. In the meantime, Yellen’s prompted traders to raise the probability of a rate hike to 57% by December.

Rate Hike in the Cards: Buy These 4 Financial Stocks Now

Thanks to the possibility of a rate hike in the near term, the financial sector that mostly comprises several industries including insurance, brokerage, asset managers and banking is benefiting. Why so? A rise in rates will enable insurance firms to invest in higher yielding government securities, thereby leading to greater returns, while brokerage firms and asset managers benefit immensely from rising-rate environments since an increase in rates generally concur with periods of economic strength and investor enthusiasm (read more: Which Investments Could Benefit From Rising Interest Rates?).

Banks benefit from a steep yield curve, i.e. when the spread between long-term and short-term rates is wide. The interest rates on deposits are usually tied to short-term rates while loans are often tied to long-term rates. This means that the potential rise in rates will empower banks to charge more for loans, leading to an increase in the spread between lending rates and the rates paid on deposits (read more: 6 Regional Bank Stocks to Buy as Rate Hike Prospects Rise).

Given the aforementioned benefits, we have selected four sturdy stocks from these areas that boast a solid Zacks Rank #1 (Strong Buy) or #2 (Buy). The search was also narrowed down with a VGM score of ‘A’ or ‘B’. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.

First American Financial Corp (NYSE:FAF) is engaged in the business of providing financial services and its segments include Title Insurance and Services, Specialty Insurance, and corporate function. FAF has a Zacks Rank #2 and a VGM score of ‘A’.

The company has also seen its earnings estimates rise from $2.82/share two months ago to just $2.97/share right now. Its estimated growth rate for the current year is 11.6% and year-to-date return is a whopping 19.4% (read more: First American Financial Rewards Investors, Ups Dividend).

Principal Financial Group Inc (NYSE:PFG) offers a range of financial products and services, including retirement, asset management and insurance services. PFG has a Zacks Rank #2 and a VGM score of ‘B’.

Principal Financial has also seen its earnings estimates rising from $4.26/share two months ago to just $4.38/share right now. The company’s estimated growth rate for the current year is 2.7%. Its year-to-date return is a solid 7.3% (read more: Principal Financial's Capital Management Remains Impressive)

Heartland Financial USA Inc (NASDAQ:HTLF) is a multi-bank holding company. Its segments include community and other banking, and retail mortgage banking. HTLF has a Zacks Rank #2 and a VGM score of ‘B’.

Heartland Financial has also seen its earnings estimates rising from $3.05/share two months ago to just $3.08/share right now. The company’s estimated growth rate for the current year is 8.8%. Its year-to-date return is an encouraging 12.9% (read more: Heartland Financial posts 2Q profit).

County Bancorp Inc (NASDAQ:ICBK) provides banking and related business activities. ICBK has a Zacks Rank #1 and a VGM score of ‘B’.

The company has also seen its earnings estimates rising from $1.6/share two months ago to just $1.85/share right now. The company’s estimated growth rate for the current year is 1.6%. Its year-to-date return is a promising 5.6% (read more: County Bancorp posts 2Q profit).

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