Wolfe Research anticipates the yield curve will steepen for weeks, perhaps months, and has created a list of stocks that could thrive as a result.
Wolfe’s choices and reasoning were cited by CNBC.
A steepening yield curve, of course, occurs when yields on long-term bonds rise faster than yields on short-term bonds. That’s usually a sign of economic strength and boosts stocks. Value stocks often outperform growth in this environment.
“As incrementally better global supply chains temporarily alleviate some inflation concerns and lead to an improving longer-term growth outlook, we heavily favor value over growth and high free cash flow names,” said Wolfe’s chief investment strategist, Chris Senyek, according to CNBC.
Wolfe started with the S&P 500 companies and filtered those that are in the top 20% for free cash flow yield in their sectors and that have been positively correlated to the spread between five-year and 10-year Treasury yields over the last year.
CNBC listed 10 of Wolfe’s stocks: Best Buy (BBY) - Get Best Buy Co., Inc. Report, Citigroup (C) - Get Citigroup Inc. Report, Dow (DOW) - Get Dow, Inc. Report, Expedia (EXPE) - Get Expedia Group, Inc. Report, Lockheed Martin (LMT) - Get Lockheed Martin Corporation Report, MetLife (MET) - Get MetLife, Inc. Report, Stanley Black & Decker (SWK) - Get Stanley Black & Decker, Inc. Report, Ventas (VTR) - Get Ventas, Inc. Report, Walgreens Boots Alliance (WBA) - Get Walgreens Boots Alliance Inc Report and Western Digital (WDC) - Get Western Digital Corporation Report.
Industrials account for the biggest portion of the list. Lockheed Martin has a 90% correlation with the Treasuries spread, and Stanley Black & Decker has an 88% correlation, according to Wolfe.
Financial companies benefit from a steepening yield curve, because they can borrow at short-term rates and lend at long-term rates. That helps explain the presence of Citi and MetLife on the list.