3 Stocks Trading At A Massive DiscountDec 15, 2022
Talk about a crazy year. People often overestimate what can be done in a day and underestimate how much can be done in just over a few months.
And in the last few months alone, we're pretty positive most people underestimated how much could happen that quickly.
To name a few things, we saw:
Inflation finally starting to peak while oil & gas prices ultimately come down
A war continuing to rage on in Eastern Europe
Interest rates at 15-year high's causing markets to crash in 2022
Nuclear fusion achieved
And the list goes on...
Unfortunately, the 1st half of 2023 is likely to be just as crazy as all of 2022. However, as investors, there are a few things we can do to get prepared for the upcoming events.
And the event we're going to focus on today is the three best ways to invest during a continued period of rising interest rates. The stocks below are therefore all trading at a discount to their true value!
In case you missed it, rising interest rates have taken center stage for the markets this year. And over the next 12 months, rising interest rates will be at the core of whether your investments work or not.
And as Jerome Powell told us yesterday, rates are unlikely to come down in 2023.
But before we dive into the stocks we like we need to first give some context on why these stocks have a great chance of outperforming in a rising interest rate environment.
As we told you in our guidance for 2022 at the end of last year, rising inflation & rising rates were going to be key themes in 2022 and boy has that held true so far.
But fortunately, this trade is far from over yet. So in order to figure out how to best play it, we need to open up the history textbooks and see what happened the last time interest rates rose during an inflationary period.
What Happened Last Time:
While no two events are 100% alike, we can use comparables to understand how markets react in similar environments. And like last time, we saw a few things happen.
In 1994, the Fed began aggressively raising rates as they moved up from 3% to 6% in just one year.
And over the course of 2022, the Fed has raised rates from nearly 0% up to ~4% -- mimicking what the Fed did in 1994.
And so with a similar raising rates schedule, we can look back and see that the last time this happened, financials (at large) did well while banks lagged. The reason this happened was because deposit-heavy banks with high variable rate deposit accounts were subject to serious costs that exceeded the benefits from their loan businesses.
What we mean by this is that most banks offer deposit accounts with either fixed, floating or non-interest-bearing accounts. In a rising rate environment, those banks that have a high percentage of their deposit accounts in floating rate accounts will be subject to high costs whereas those with high fixed or non-interest rate accounts will benefit greatly.
The reason they will benefit outside of lower costs is that they will be able to arbitrage the difference between what they pay deposit accounts and what they can earn on them. Combine that with higher margin loan accounts and these types of financials can outperform whereas other financial institutions will be at serious risk!
How To Play It:
Therefore when we analyze the financials sector, stock selection becomes more important than ever.
If you want to outperform in 2023, investors need to not only get the sector right but they also need to get the stock right and not just pick the index.
Therefore the financial stocks that we like display the following characteristics:
Most of their deposit accounts have fixed rates or are non-interest rate-bearing accounts.
They are a large lender.
And they're positioned to do well over the next 5+ years. The reason this last point is important is because financials often start significantly outperforming in the back half of the rising rate schedule. And because the end of the schedule is impossible to predict, we are allocating now and holding onto names that will be strong into the future.
Top Stocks For Rising Rates:
First on our list is Silvergate. Out of any stock on this list, Silvergate is by far the biggest boom or bust pick.
If you're not familiar with Silvergate, they are one of the largest crypto-led banks out of there. This is not your traditional boring finance play.
But a lot of their success will hinge on crypto's ability to have a strong 12-24 months. And while it seems crazy now, crypto will likely come back into the centerfold once markets start rebounding.
While it may not happen tomorrow, we believe Silvergate is ready to stand benefit to this eventual institutional inflow. And on top of that, Silvergate is the most rate-sensitive bank we cover. This is what they have going for them too:
A key theme of this post -- Silvergate's non interest-bearing deposits represent 99% of their asset accounts. Comparing this to their peers we see that the industry average is near 35%. And as we've mentioned several times now non or fixed interest-bearing deposit accounts are key for 2023 and beyond. The reason being is if Silvergate is paying 0% interest on 99% of their deposits, that means their costs are WAY LOWER than any of their competitors.
And not only will they save on costs but their assets will perform very well in a rising interest rate environment too! This is because most of Silvergate's assets are variable rate assets - with rising interest rates, their assets increase more substantially in value.
Therefore we're reiterating our overweight rating and our price target of $50. This is a LONG TERM play that will take time to play out -- so if you're going to play this one, make sure you have a long time horizon and a high-risk tolerance.