I'm not much of a macro trends guy, and I'm certainly no market timer. But with interest rates still sitting near historic lows even as the money supply expands and the economy grows, this seems like a good time to add to our watchlist some stocks poised to profit if interest rates rise. Here are three companies I'll be keeping my eye on.
Automatic Data Processing
If you've held a job sometime in the past decade, there's a solid chance that Automatic Data Processing
ADP's client funds balance has rebounded strongly over the past year, up more than 70% from $18.8 billion last summer, thanks to wage growth and early signs of a rebound in employment. But all that money is still earning low interest rates -- just 3.6% last year. If interest rates rise, ADP will begin raking in gobs more effort-free cash.
If you read the previous paragraph, here's a one-line explanation of Paychex
Often described as a miniature Berkshire Hathaway
How would rising interest rates help Markel? There are two pools of investment for the company. First, Markel invests enough to cover its expected claims in liquid, cash-like investments (such as money market funds and Treasuries). The remainder is allocated to more interesting, outsized-return seeking investments in stocks and private businesses. As interest rates rise, less capital needs to be invested in the former cash equivalents category to meet expected claim payments, meaning that more funds can be devoted to the value-creating investments in the latter category. And Markel Chief Investment Officer Tom Gayner is seeing no shortage of investment ideas. Two weekends ago at the annual Markel breakfast in Omaha, I heard him tell a roomful of shareholders that he has "more ideas than money."
What's on your watchlist?
I don't know when higher interest rates will arrive, but I want to ensure I am poised to profit when they do. That's why these three stocks are making my watchlist today. If you'd like to stay tuned to learn if I decide to put real money behind any of these ideas, you can follow along on Twitter.
To add any of these stocks to your watchlist, just click on the links below:
- Add Automatic Data Processing to My Watchlist.
- Add Paychex to My Watchlist.
- Add Markel to My Watchlist.
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