6 Stocks That Will Profit When the Fed Moves

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Most people see higher interest rates as the kiss of death for the stock market. But the same thing that would make many companies have to struggle a lot harder could actually be a huge boon to others -- especially those that learned from the experiences of the past two years.

Cash is still king
If there's a single lasting lesson from 2008's financial crisis, it's that relying on the capital markets for money is a risky proposition. Most of the time, companies have very little trouble getting cash, either by selling bonds to investors looking for a steady stream of income or by offering stock to investors looking for a lot of growth potential.

When interest rates are low, debt offerings become more popular, especially since they lock in low fixed financing costs and don't dilute the profits of existing shareholders. In a rising rate environment, however, it becomes harder for many companies to afford the carrying costs of their debt. That in turn forces those companies into a dilemma: Do they do a new stock offering that dilutes their current investors, or do they gamble on being able to generate enough cash flow to cover expensive debt payments?

That question isn't easy to answer. If you'd rather not have to answer it at all, then the smartest thing to do is to pick stocks that generate their own capital without relying on anything but their customer base and the success of their own business models.

Who's got the money?
If higher rates hurt borrowers, then logically, they should help lenders. And many large corporations are among the biggest holders of cash right now. Just take a look at the big balance sheet presence that the following companies have:


Cash and ST

Bottom-Line Impact of 2-Percentage-Point
Move in Rates

Apple (Nasdaq: AAPL  )

$23.46 billion

$469 million

Google (Nasdaq: GOOG  )

$21.99 billion

$440 million

Qualcomm (Nasdaq: QCOM  )

$11.07 billion

$221 million

Visa (NYSE: V  )

$4.80 billion

$96 million (Nasdaq: AMZN  )

$4.00 billion

$80 million

Nike (NYSE: NKE  )

$4.01 billion

$80 million

Source: Yahoo! Finance. ST = short-term.

Now note that these companies aren't the top cash hoarders out there. Microsoft (Nasdaq: MSFT  ) , for instance, has over $33 billion in cash available. But what the companies above all share is not just a rich stash of cash. In addition, none of them has more than $1 billion outstanding in total debt.

Easy earnings
That leaves these companies in prime position to benefit from interest rate increases. As you can see above, even if the Federal Reserve moves interest rates back to the 2% range -- which would still arguably be fairly accommodative compared to historical levels -- these companies would add tens or even hundreds of millions of dollars to their bottom lines annually.

Granted, for many of these companies, even huge boosts from interest income wouldn't move the needle on their total earnings very much. Apple, for instance, has posted a net profit of $5.7 billion in the past 12 months, so an extra $470 million or so represents just 8% of current profit. The proportions are even lower for some of the other companies on the list.

But cash isn't valuable only for its interest-generating potential. It opens up an array of options for a company. Companies can return excess cash to shareholders through dividends. They can make strategic acquisitions without worrying about incurring debt. They can plough funds into capital-intensive internal businesses, taking advantage of opportunities that less cash-rich companies can't capitalize on and therefore creating a competitive advantage.

Always look for an edge
Many investors fear higher interest rates, and that fear is warranted for many companies. But there are always exceptions to general rules. Understanding where those exceptions are and knowing how to find them will give you a big edge over other investors -- one that you can exploit to reap big profits over the long haul.

Some stocks will soar no matter what the market does. Let Austin Edwards show you the market's next big movers.

Fool contributor Dan Caplinger wouldn't mind some higher rates himself. He doesn't own shares of the companies mentioned in this article. Google is a Motley Fool Rule Breakers selection. Apple and are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a diagonal call strategy on Microsoft, which is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is ready for whatever comes next.

Read/Post Comments (3) | Recommend This Article (16)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 20, 2010, at 5:21 PM, jaketen2001 wrote:

    Whew. An article with some valid, not widely examined insight. TY TMF!

  • Report this Comment On January 20, 2010, at 8:50 PM, topsecret09 wrote:

    Too bad just ONE SHARE of each of these companies would set you back $1,114.00 for a grand total of 6 shares. Here's what you do Instead.... (ALIF) 100 shares @ $1.42 (ARIA) 100 shares @ $2.33 (LGDI) 100 shares @ $1.42 (EGMI) 100 shares @ $1.43 (LXRX) 100 shares @ $2.25 (XRIT) 100 shares @ $2.42 Grand total of 600 shares for a cost of $1,127.00. Just for the heck of It,I will follow these and see which performs better... The small cap portfolio,or the overpriced,overhyped portfolio........ TS

  • Report this Comment On January 20, 2010, at 9:02 PM, topsecret09 wrote:

    ALIF has downloadable APPS for Apple I pods, ARIA will be reporting results soon on their main phase three drug (RIDIFORMULOUS) EGMI has the Interest of 3M Corp to the tune of 6 million shares LXRX reported positive phase two results for their Diabetes drug,and has more results to come In the near future XRIT Is a pure play If your Into colors,bottom line Is Improving LGDI Is a phosphate play that I blogged about at 62 cents a share with partners from China and India on board..... Good Luck..... TS

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