With the Federal Reserve set to start gradually raising interest rates in 2022 after a period of near-zero rates, some investors are naturally thinking about how to buy stocks in this changing market environment. In this segment of Backstage Pass, recorded on Jan. 10, Fool contributors Rachel Warren and Jason Hall, along with Fool Canada analyst Jim Gillies, discuss some fantastic companies that are primed to thrive even as interest rates soar.
10 stocks we like better than Vertex Pharmaceuticals
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Jason Hall: Rachel, you've got an interesting take here. I like this.
Rachel Warren: Yeah. Well, I'm in healthcare writer. So I had to pick a healthcare stock. The thing I like about the healthcare industry and investing in this space is that it is really primed to do well regardless of what's happening with interest rates, with the market, or the economy because people need their medicines, people need these products and services no matter what's happening in those spaces.
The stock I picked is a lesser-known healthcare stock. It's called Vertex Pharmaceuticals (VRTX 0.56%). This company is the leader, if not the market leader, in the cystic fibrosis therapeutics space.
It has four products that are currently approved. One of them, its flagship product, Trikafta, is approved to treat, I believe now, more than 90% of all individuals who have cystic fibrosis. Incredible market leader there. All of its four approved drugs are the only CFTR modulators on the market.
For the nonmedical people in the audience, including myself, essentially that means these drugs target the defects in the protein that cause someone to have cystic fibrosis.
The company is profitable, as well as seeing a lot of revenue growth. Product revenues were up 29% in the most recent quarter year over year. Net income, 28% year over year. Great company to look at. Not one that's going to blow up your portfolio overnight, but I think can lend some consistent growth.
Jason Hall: When the trends in the industry matter more than what's going on with interest rates, that's awesome. Jim, what you got for us? Real quick.
Jim Gillies: Well, I'm going to go straight into the banks, specifically Canadian banks. We have six big banks here in Canada, five of which are dual-listed in New York and Toronto.
Bank of Nova Scotia (BNS -1.82%), Royal Bank (RY -1.71%), TD or aforementioned Ameritrade, former parent, CIBC [Canadian Imperial Bank of Commerce (CM -1.42%)], Scotiabank [the name under which Bank of Nova Scotia operates], BMO [Bank of Montreal (BMO -1.62%)], and National Bank (NA -1.85%).
The thesis is half played out because I was saying last summer they've been barred from raising their dividends. They usually like to raise their dividends once or twice a year.
They've been barred for two years almost through the pandemic and buying back stock. I said when the gloves come off or when the shackles come out, they're all going to trip over themselves raising their dividends. That in fact happened in the most recent quarter. I think the average hike was 14, 15%.
But it's just a play on higher interest rates. Increases that interest margin and a rising rate environment, the banks tend to do well. The Canadian banks are all at better valuations than the big U.S. money center banks.
Go with one of those six. If you really want to have a little bit of fun, there's an ETF called HCAL traded on the TSX, which is all six of them, except it employs both reversion to the mean. They tend to trade together valuation-wise, based on the reversion-to-the-mean investing style.
It buys the cheaper three in a much larger allocation, less than the more expensive three.
Then, as things change, they rebalance. They also employ 25% leverage because what's more fun than leverage banks, leverage on top of leverage. Oh, and 5.5% dividend yield right now. Toby is for a fight.
Jason Hall: I'm going to toss Bank of America (BAC -1.75%) on top of that. That's terrifying, Jim, I love the idea.
But I'll toss just as far as the big American bank, Bank of America, because it has a massive depositor base and essentially doesn't pay a yield to its depositors, it's infinitesimal. [laughs]
If they raise it, it's going to be tiny and they're going to get a better net interest margin on the backside when they lend that money back out.