With inflation running hot, many investors are justifiably worried about interest rates rising significantly in the next year or two. And while this is likely a negative catalyst for many high-growth stocks, some companies could actually benefit from rising rates. In this Fool Live video clip, recorded on Sept. 30, Fool.com contributors Matt Frankel, CFP, explains to colleague Brian Withers why Berkshire Hathaway (BRK.A +0.51%)(BRK.B +0.43%) could be a stock worth watching if you think rates are about to climb.
Matt Frankel: Berkshire Hathaway, for lack of a better term, it's been a boring stock lately, but in a good way. No big headlines. Can you guys remember the last time Warren Buffett was in the headlines? I can't. It's been a little while. He hasn't made any big stock purchases lately, big acquisitions, hasn't lost any money so it's been boring in a good way. It keeps making new all-time highs so I wanted to mention a story that won't affect Berkshire and that is rising interest rates.
Anyone who has really been following the markets over the past week or so has noticed, especially the high-growth tech stocks have been under pressure. The main reason is because those are very sensitive. Without getting really too into the mechanics, they're really sensitive to rising interest rates. The 10-year treasury yield over the past week has spiked from about 1.32% to 1.54%. That's a big move in one week for that, and that's considered the benchmark interest rate.
That's why you're seeing a lot of tech stocks really react negatively. Berkshire could actually be a beneficiary of rising interest rates. If you're looking for a way to insulate yourself, if rates continue to spike, which a lot of people think they will, because of the inflation going on, the Fed tapering, things like that. Just to name a few reasons, number one, Berkshire has over $140 billion in cash. That's not money sitting in a bank like Scrooge McDuck or something like that, that's money that's sitting in an interest-bearing account that's right now earning next to nothing. Interest rates go up that $140 billion can actually be making a better return.
Berkshire also has a lot of bank stocks, including about 12% of Bank of America (BAC +3.23%). Banks benefit when interest rates go up, the cost of borrowing goes up. If the average auto loan interest rate grows from four percent to six percent, banks make more money. Berkshire has very few rate-sensitive investments. I'd bet Brian Withers and Warren Buffett's portfolios are exact opposites in terms of the kind of stocks they own. I'm sure Brian's investments have been rate-sensitive over the past week or so. The tech stocks have really taken a hit, right?
Brian Withers: Absolutely.
Frankel: With the exception of maybe Snowflake (SNOW +0.50%), which is in Berkshire's portfolio, you're not going to find a lot of these interest rate-sensitive tech stocks. Finally, Berkshire's core insurance business makes a lot of its money from fixed income investments, which are obviously tied to rising interest rates so rising interest rates help Berkshire in a lot of different ways and it could be a nice little hedge if you have a lot of high-growth tech stocks and you're worried about interest rates going up.
