The training wheels are off and the U.S. economy is healthy once again, at least according to the actions of the Federal Reserve which ended its monthly economic stimulus known as QE3 in October. Designed to improve housing market liquidity and keep long-term lending rates down, the end of QE3 could signal the Fed's intent to boost short-term lending rates in 2015.
With this in mind we asked three of our top analysts to name one stock they're dying to own now that QE is over. Here's what they had to say.
Dan Caplinger: At first, the connection between quantitative easing and aerospace giant Boeing (NYSE:BA) might seem tenuous at best, given that the company isn't in the financial industry and that interest rates don't have a huge direct impact on Boeing's financials. But implicit in the end of quantitative easing is the Federal Reserve's belief that the U.S. economy is back on solid footing for the long run, and Boeing stands to play a major role in domestic economic growth for decades to come.
Airlines continue to be healthier than ever, and to boost profit margins, they're likely to keep buying new Boeing aircraft to replace costlier aging fleets. Already, Boeing expects more than $5 trillion in industry aircraft sales over the next 20 years, and the airplane maker already has massive backlogs of orders that will keep it busy for years to come. At the same time, geopolitical concerns have made policymakers aware of the need to maintain a solid defensive posture militarily, and the potential for conflict around the world could help bolster Boeing's defense business after years of struggling under budget-cut pressures. Overall, any sign of improvement in the U.S. economy overall is a sign that Boeing will continue to take the lead and help foster growth through its innovation and manufacturing prowess.
Selena Maranjian: Now that the Federal Reserve's Quantitative Easing (QE) program is over, we can expect interest rates, which have been at historically very low rates for many years now, to finally start rising. That's good news for the savers among us, who have been stuck with puny interest rates in savings accounts and CDs – and it's good news for companies that profit from higher interest rates, too. These include insurance companies such as MetLife (NYSE:MET), the nation's biggest life insurer.
I find MetLife's stock quite appealing for a lot of reasons, beginning with the prospect of rising interest rates. Remember that insurers take in a lot of money in premiums, which they invest in relatively safe places (think, for example, bonds) while waiting to pay out claims. The company is already performing well, though, topping analyst expectations for operating earnings in its last quarterly report. It's targeting additional growth in the promising and not-saturated market of Asia, and is embracing e-commerce, with a mobile interface for customers. The company has spent nearly a billion dollars buying back its own stock, and has just authorized another billion for the same purpose.
MetLife's stock recently yielded 2.5%, and its payout ratio is quite low, near 29%, suggesting plenty of room for further growth. The company's forward-looking price-to-earnings (P/E) ratio is well below its five-year average of 11.4, too, suggesting an attractive price. Here's one thing to keep an eye on, though: The company was recently voted as "systemically important" by the Financial Stability Oversight Council, which means it might be subject to additional oversight and may have to make some changes, such as selling some assets. MetLife doesn't want to be considered too big to fail, though, and may appeal the decision.
Sean Williams: With the Federal Reserve's economic stimulus in the rearview mirror and U.S. GDP roaring higher by 5% in the third quarter I'm squarely looking at payroll processor Paychex (NASDAQ:PAYX) as a prime beneficiary for two particular reasons.
For starters, the end of QE would imply to Wall Street and consumers that the U.S. economy is capable of standing on its own two feet. Some investors may have been sad to see the Fed's "free money" go away, but it's an important step for the U.S. economy to have its "training wheels" taken off. The adjusted 5% GDP growth in Q3 along with a falling unemployment rate suggests that hiring is improving – a good sign for payroll companies like Paychex which will net higher fees from covering more employees.
The other factor to consider here is that the end of QE should result in a steady rise in short-term lending rates beginning in 2015. While higher interest rates would instantly benefit banks and insurers, its an oft-overlooked point that payroll companies have a lag time between when they collect payments from employers and issues checks to employees. This float time will allow Paychex to net more substantial profits assuming lending rates rise.
Considering that Paychex is already divvying out a 3.3% yield I suspect it's a company that could really turn heads in 2015.