A real interest rate—as opposed to a plain old rate—is an interest rate minus the expected annual inflation rate. For real rates to increase, the interest rate has to increase faster than the rate of inflation is rising
That is what is already happening as investors prepare for the Federal Reserve to tackle the surge in inflation that has resulted from pandemic-related supply-chain problems and pent-up demand
In this environment, one class of stocks can thrive: so-called quality value stocks whose earnings can withstand any economic turbulence brought on by higher interest rates. Those stocks are valued more reasonably in terms of their prices relative to anticipated per-share earnings
Here are four companies that move most closely in line with real rates, with stock-price gains as rates rise. All four trade for lower multiples than for the S&P 500 as a whole, aren’t economically sensitive, and have already outperformed the index this year
Walgreens Boots Alliance (WBA) has the highest correlation to both the real fed funds and 10-year Treasury rates, at 1.58. It trades at 10.6 times analysts’ average earnings per share projection for the next year, versus the S&P 500’s 20 times. And it is in the consumer-staples business, which doesn’t see much of a hit to sales growth even when consumer watch their budgets more closely. The stock has risen 0.8% year to date, while the S&P 500 is down 4.5%
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