is prudent to explore why UnitedHealth Group Incorporated (UNH), Costco Wholesale Corporation (COST), and NextEra Energy, Inc. (NEE) could be wise portfolio additions now. Read on…
The 10-year Treasury yield surpassed 4.2%, and just a few weeks earlier, it hit its highest level since 2008, indicating investors are delaying their expectations regarding potential interest rate cuts by the Fed.
BMO Capital Markets head of U.S. rates strategy Ian Lyngen regards this uptick as a compelling opportunity for investors. In his view, the 10-year Treasury bond is a "screaming buy" for investors, owing to the Fed's successful endeavors in combating inflation.
Treasury yields and the stock market traditionally display an inverse relation. Still, defensive stocks, such as healthcare, utilities, and consumer staples, defined by their necessity, remain resilient. These sectors tend to preserve their revenue streams and overall stability, notwithstanding the volatility of the market conditions.
Before delving into the fundamentals of the stocks that could be solid buys now, it is crucial to understand the larger economic forces at play.
Why 10-Year Treasury Yield Is Rising
The Federal Reserve has implemented an 11th benchmark rate increase, announcing a 25-basis-point rise in July, escalating the interest rates to a 22-year high of 5.25% to 5.5%. Despite inflation notably declining from a 9.1% peak in June 2022 to 3.2% in July 2023, it still remains above the Fed’s 2% target.
In job market, the U.S. Bureau of Labor Statistics reported an increase in August's unemployment rate to 3.8%, up from July's 3.5% and reaching the highest since February 2022. Despite this, positive signals came from average hourly earnings, which showed a 0.2% increase for the month and a year-over-year increase of 4.3%. Furthermore, the U.S. economy outstripped forecasts with 187,000 new jobs.
In addition, American consumer spending showcased resilience, with sales at U.S. retailers picking up 0.7% month-over-month in July. Retail sales grew 3.2% year-over-year. Private consumption, which makes up nearly 70% of the U.S. GDP, remains strong, bolstered by sustained low unemployment and solid wage growth.
Some analysts had mooted that the Fed's rate hike spree might end. However, recent robust economic data have cast doubt on these assumptions, and uncertainty about its future monetary policy continues. Officials expressed concern in minutes from the Fed's July meeting that further rate increases could be a necessity due to the potential for persistent price rises.
As is generally understood, bond yields and bond prices follow an inverse relationship. Therefore, as interest rates increase, current bond prices tend to fall, consequently raising yields.
Respected market analyst Ed Yardeni predicts the 10-year Treasury yield could further escalate, spurred by increasing anxieties over the U.S. debt levels. He speculates that this yield could exceed 4.5% this year, potentially triggering a sell-off in the S&P 500 of up to 10%.
Why Are Treasury Securities Screaming Buys Now?
The government backs Treasury securities. Historically, the U.S. has always paid its debts, which helps to ensure that Treasurys are the lowest-risk investments one can own. 10-year Treasury bonds make interest payments every six months.
The market for U.S. Treasurys is the largest, most liquid market in the world, making them easy to sell if one needs access to their cash before the maturity date.
Chase Lawson, author of ‘Financial Freedom: Breaking the Chains to Independence and Creating Massive Wealth,’ believes that there’s consistent income potential with Treasury bonds, and one’s investment likely would not decline if the stock market tanks, like other investment vehicles, can do.
Since interest rates could remain high for a while, the 10-year treasury yield is anticipated to maintain momentum.
Stocks That Could Perform Well Even When Treasury Yields Are Rising…
High bond yields might potentially signal warning signs for stocks. Bonds compete for the same investor dollars as equities, and when yields surge, equities often go down. This trend arises because bonds, especially those with higher yields than stocks, usually become more attractive. Furthermore, while stocks carry inherent risk, bonds offer a safer option.
When the 10-year Treasury bond yield is strong, investing in stocks less influenced by interest rates is typically wise. Enterprises involved in utilities, consumer staples, and healthcare sectors tend to present stable earnings and cash flows and are less vulnerable to interest rate fluctuations.
Defensive stocks provide stable earnings and consistent returns, even amid an economic downturn. These stocks are nearly always in demand because they provide essential products and services.
Below, we look into the fundamentals of three stocks worth considering under current market conditions:
The U.S. ranks among the nations with the highest healthcare expenses globally. Compounded by the fact that these costs are increasing at a rate that exceeds inflation, health insurance has transitioned from an optional safeguard to a fundamental necessity.
With a robust market capitalization of $443.40 billion, the Minnesota-based health insurer UNH operates through four segments: UnitedHealthcare, Optum Health, Optum Insight, and Optum Rx.
The corporation reigns as the largest healthcare company in the United States, eclipsing even the biggest banks in the country. Its substantial stature is deemed a bellwether within the extensive health insurance sector. The company's robust performance stems from the contributions of two major business units, UnitedHealthcare and Optum.
These entities continually endeavor to deliver patient-centric healthcare services at reasonable prices across numerous American communities and follow a strategic alliance with reputable care systems.
UNH recently announced a dividend payout of $1.88 per share, payable on September 19, maintaining its commitment to stockholder returns.
UNH’s revenue grew at 12% and 10.3% CAGRs over the past three and five years, respectively. The company’s EBITDA and net income rose at CAGRs of 7.9% and 7.3%, respectively.
For the second quarter that ended June 30, 2023, the healthcare giant saw $92.90 billion in revenue, a 15.6% surge. This escalation was chiefly driven by double-digit expansions within its insurance division and Optum Health Services wing. Its earnings from operations rose 13% from the year-ago value to $8.06 billion.
Moreover, adjusted net earnings attributable to UNH common shareholders grew 9.1% year-over-year to $5.77 billion, whereas adjusted EPS increased 10.2% from the prior year’s quarter to $6.14, topping analyst expectations of $5.99.
Year-to-date, the total number of people served by UnitedHealthcare with medical benefits has increased by over 1.1 million. Growth across the company’s commercial benefit offerings indicated the corporation's emphasis on innovative and reasonably priced benefit plans.
Meanwhile, the number of people catered to by the company's senior and community offerings grew by 625,000 due to product and benefit customizations to meet the unique needs of the aging population and economically disadvantaged individuals.
UNH’s robust financial health and fundamental solidity make it an appealing investment opportunity for institutional investors. Notably, several institutions have recently changed their UNH stock holdings.
Institutions hold roughly 87.3% of UNH shares. Of the 3,307 institutional holders, 1,623 have increased their positions in the stock. Moreover, 155 institutions have taken new positions (1,445,591 shares).
With a market cap of $241.18 billion, COST, the prominent warehouse club operator, continues to exhibit strong performance driven by strategic growth plans, optimized pricing policies, and substantial membership trends. These elements have been instrumental in bolstering the solid sales figures for the company.
COST’s revenue grew at 13.5% and 11% CAGRs over the past three and five years, respectively. The company’s EBITDA and net income rose at CAGRs of 15.8% and 17.4%, respectively.
Sales momentum continued through August, with net sales showcasing a 5% year-over-year increase to $18.42 billion for the retail month, an impressive follow-up to the 4.5% enhancement witnessed in July.
As the U.S. observed Labor Day, budget-minded shoppers looked forward to making the most of the annual sales. COST had put forth Labor Day promotions on an array of products, a move likely to boost the company’s sales figures further.
COST's business model of leveraging economies of scale and maintaining low-profit margins creates a virtuous cycle that perpetuates customer loyalty and fosters a competitive edge. This deliberate choice of prioritizing customer satisfaction over immediate profits has proven fruitful, significantly contributing to customer retention and repeat business–crucial elements in today’s highly competitive retail industry.
The catalysts driving COST's growth include its ongoing global expansion and remarkable renewal rates. The company continues to amplify shareholder value with shareholder-friendly management, reliable dividend payouts, and efficient capital reinvestments.
Its unique membership business model and pricing power distinguish it from its traditional counterparts. As of the third quarter of 2023, it revealed an encouraging 92.6% renewal rate within the U.S. and Canada, which testifies to robust customer loyalty levels and satisfaction.
The impressive renewal rate guarantees consistent revenue flow from membership fees, increases customer lifetime value, and enhances overall profitability. As the quarter concluded, COST reported having 69.1 million paid household members and 124.7 million cardholders.
Changes have been observed concerning institutions' holdings of COST shares. Approximately 68.1% of COST shares are presently held by institutions. Of the 3,168 institutional holders, 1,456 have increased their positions in the stock. Moreover, 212 institutions have taken new positions (1,307,195 shares), reflecting confidence in the company’s trajectory.
With a market cap of $135.33 billion, NEE stands as a leading utilities provider in the industry. The company focuses on generating renewable, clean, and sustainable power, serving millions of customers across North America.
Highlighted by its robust historical performance, NEE has presented a compelling case for investor interest with consistent, long-term dividend growth that offers shareholders stability and income. Particularly noteworthy is the company's anticipation to increase its dividend per share by approximately 10% annually through 2024, based on dividends from 2022. This strategy confirms confidence in potential cash-flow growth that supports these higher dividends.
NEE's impressive financial figures testify to its efficient management and ability to maintain regular profit generation even in a highly competitive sector. The growing earnings base allows it to return significant cash to its shareholders.
NEE’s revenue grew at 13.5% and 11% CAGRs over the past three and five years, respectively. The company’s EBITDA and net income rose at CAGRs of 15.8% and 17.4%, respectively.
For the fiscal second quarter that ended June 30, 2023, the company’s operating revenues stood at $7.35 billion for the quarter, up 41.8% year-over-year, exceeding analyst projections. Its adjusted earnings per share stood at $0.88, up 8.6% year-over-year.
NEE's long-term financial expectations remain unchanged. For 2023 and 2024, it expects adjusted EPS to be in the ranges of $2.98 to $3.13 and $3.23 to $3.43, respectively. For 2025 and 2026, adjusted EPS is expected to come between $3.45 to $3.70 and $3.63 to $4.00, respectively.
As a result of its dedication to environmental sustainability and consistent shareholder value creation, NEE has captured the attention of investors and market analysts. Ownership data indicates institutional holders have a significant interest in NEE, accounting for approximately 77.7% of NEE shares. Of the 2,557 institutional holders, 1,206 have increased their positions in the stock. Moreover, 134 institutions have taken new positions (5,266,359 shares), reflecting confidence in the company’s trajectory.
In conclusion, the U.S. stock market seems to have a strong foundation of sturdy economic growth and investor credibility in defensive equities, particularly those offering dividends, as a safeguard against inflation. Even though rising bond yields could potentially destabilize specific sectors, stocks less sensitive to interest rate variations and displaying consistent earnings and cash flow are optimally positioned to yield substantial returns.