The Dirty Little Secret Goldman Doesn't Want You To Know...

Sara Nunnally's picture

Wednesday, September 14, 2016 - 12:30pm

by Sara Nunnally

In late 2015, before the first interest rate hike in ten years, Goldman Sachs (NYSE: GS) released a note to investors about financial companies that stood to benefit from a lift in interest rates.

The company namechecked Ramond James (NYSE: RJF), Bank of New York Mellon (NYSE: BK), Northern Trust (Nasdaq: NTRS) and Bank of America (NYSE: BAC) in particular, as potential winners in the event that the Federal Reserve raised rates by 50 basis points... a bit of an outlier, but an interesting hypothesis nonetheless.

Goldman said that these companies would benefit from a 50 basis-point hike because they would "get most of the earnings upside from rates in the initial hikes rather than relying on normalized rates."

But did they?

Not according to their share price movements.

These four companies have been flat to down during the past nine months since the hike...

Historical data doesn't back up Goldman, either. From Fortune, on December 16, 2015, the day of the rate hike:

Banks often get pointed at as potential buys when interest rates rise. And share of the biggest banks have been rising lately. That's because they can benefit from higher interest rates as long as they don't have to pass that higher interest off to borrowers. But TIAA-CREF's data shows that financials only outperformed the market 14% of the time, dropping an average of 4%.

And get this. Goldman Sachs itself DECREASED its exposure to the financial sector in the months leading up to the interest rate hike.

In its Semi-Annual Report released on February 29, 2016 for its Fundamental Equity Value Funds, Goldman said that during the reporting period (for the six months ending February 29, 2016), it decreased the Funds' exposure to consumer discretionary, financials, industrials, energy and information technology sectors.

Interesting to see that while Goldman is touting financials, it's actually buying something else.

(But it's not really surprising to anyone, is it? Have you watched The Big Short, or read my Barbarians of Wealth?)

To be fair, Goldman's idea of investing in financials that can take advantage of a big pop in interest rates does make sense in theory... but the Federal Reserve time and time again has erred on the side of extreme caution. The first rate increase in ten years hit the markets with a mere 25 basis points, and the markets actually rejoiced!

So, as we creep closer to the next rate hike, what should we be looking at?

Maybe we should flip the old saying, "Do as I say, not as I do," on its head. Goldman increased its exposure to the telecom, consumer staples and health care industries.

Let's start looking there. I ran these three industries through my favorite market screener, and started to look for value.

According to Goldman, valuations of the stock market tend to drop 10% in the first year of a tightening cycle.

After filtering out small- and micro-cap stocks, here are the top value picks for each of these three industries:

Telecommunications: T-Mobile US (Nasdaq: TMUS), a mobile communications provider

Consumer Staples: McKesson Corp. (NYSE: MCK), a pharmaceutical distribution company

Health Care: UnitedHealth Group (NYSE: UNH), a health insurance provider (A quick note... Humana (NYSE: HUM) did top the value list, but as it's in talks with Aetna on a possible merger, I chose to list UnitedHealth Group to avoid the news volatility.)

Take a look at how these three have performed since the first rate hike back in December 2015.

The low performer is McKesson Corp., though the stock appears to be making a bit of a comeback from lows in early February of this year.

TMUS and UnitedHealth have both performed very well over the past ten months, pulling in 17.38% and 14.05% respectively. 

Analysts appear to like all three... Yes, including McKesson. MCK doesn't have a single analyst advocating selling shares. The average price target for MCK is $208.31, or 15.5% higher than current prices. TMUS analysts expect a target price of $52.57 or a 14.5% gain, while analysts for UNH are targeting a gain of 19.4%, or $161.77 a share.

UNH has by far the most optimistic forecasts from analysts. Earnings are expected to climb 22.8% this year and another 14.5% next year.

Keep in mind, too, that analysts have been revising earnings expectations upward for both this year and next... and that UNH has beaten quarterly earnings forecasts for at least the past four quarters.

It's certainly my pick of the lot for a long-term growth stock with a hefty market cap and a lot of stability.

Risks To Consider: The consolidation in the insurance sector may have an uncertainty effect on UNH shares. The fact that some providers are pulling out of Obamacare in certain rural areas is also a risk. Indeed, some members of Congress are asking Aetna for answers after it pulled out of five Obamacare exchanges.

These risks aren't small, and they are in flux.

And they aren't likely to be over soon. In the meantime, though, UNH shares -- and its financials -- are rising.

Action To Take: With a potential 19.4% share price climb (with the most ambitious analysts calling for as much as 35.7%), UNH is a powerhouse.

As we head towards another rate hike, adding UNH to your portfolio could be a profitable move.

Editor's Note: We're locking in a paycheck of $15,100 for every $100,000 we invest... and our dividends keep growing... sometimes overtaking our original stock price. Invest like this and it just might change the way you think about investing forever.

Sara Nunnally does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.