5 Stocks That Could Benefit From the Fed’s Rate Decision
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Well, it’s official. After a month of speculation, the Federal Reserve raised the fund rate by 25 basis points, pushing the rate range between 4.75% and 5.0%.
Higher interest rates typically make it more expensive for companies to borrow money and, as a result, turn a profit. As companies become less profitable, their stock prices can slip as investors perceive less reward from a company that’s losing cash.
For some stocks, however, the opposite effect can happen: Higher interest rates can lead to higher profits. The following are five such companies that could profit from the Fed’s decision to hike rates.
1. Airbnb (ABNB)
What it is: Booking company that connects short-term rentals with guests. It makes most of its revenue off service fees and interest income.
How high interest rates could help it grow: Like other booking companies, Airbnb often requires guests to pay for a portion of their stay upfront — even if the stay is months away. Because there’s usually a gap between booking and staying, the company will deposit this cash into money market funds, CDs and treasury notes to earn interest. Rising interest rates means Airbnb will make more money off cash stored in these accounts. In fact, in Q4 2022, Airbnb attributed $103 million of its $319 million net income to interest.
Year-to-date performance: around 41%
Market cap: around $78 billion
2. Charles Schwab (SCHW)
What it is: Schwab is one of the largest U.S. banks by assets ($7.38 trillion). The bank makes money off of fees and interest-earning assets.
How it could benefit from high interest rates: More than 50% of Charles Schwab’s 2022 net revenue came from assets that earn interest. When interest rates go up, the bank’s revenues will likewise get a major boost. This was the case in 2022, when the company’s net interest revenues increased by 33% over the prior year to roughly $10.7 billion.
Year-to-date performance: around -32%
Market cap: around $102 billion
3. Fair Isaacs (FICO)
What it is: Fair Isaacs, or FICO, is an analytics company that creates credit scores for consumers — this is the FICO credit score you often hear about. It makes money when clients buy access to its crediting system.
How high interest rates could help it grow: FICO doesn’t make money off high interest rates. But it could make more money if consumers became concerned about maintaining high credit scores, which would lower the cost of borrowing money. The company might also form more lucrative partnerships with financial companies, like its recent multi-year agreement with fintech company Array, which can embed credit scores for FICO into accounts.
Year-to-date performance: around 13%
Market cap: around $17 billion
4. Kinsale Capital Group (KNSL)
What it is: Insurance company that sells property, casualty and special insurance products.
How high interest rates could help it grow: Kinsale collects customers’ premiums and invests them in interest-earning assets until it has to pay insurance claims. Higher interest rates means Kinsale can generate more revenue from these assets. In fact, in Q4 2022, Kinsale’s net investment income grew 106.7% year-over-year to $17.7 million .
Year-to-date performance: around 10%
Market cap: around $6.8 billion
5. Costco Wholesale (COST)
What it is: Big-box retailer that makes money off membership fees.
How high interest rates could help it grow: Costco may attract more inflation-weary and bargain hunting consumers to its membership program, especially those looking for cheaper gas prices. Costco also has a rock-solid balance sheet with strong cash flow and low debt, which can insulate it against higher borrowing costs.
Year-to-date performance: around 7%
Market cap: around $217 billion
The author owned shares in Airbnb and Charles Schwab at the time of publication.