Hi I'm Susan Dziubinski with Morningstar. Many investment service firms, such as wealth managers, retail brokerages, and asset managers, have businesses that are sensitive to interest-rate movements. For example, clients at retail brokerages typically have 5% to 20% of their account balance in cash. The brokerage sweeps that cash into a bank subsidiary, and that bank uses those cash deposits to make loans or to invest in fixed-income securities. They may also earn asset management or distribution fees on client assets in money market funds.
Given that we're in a rising-interest-rate environment, our analysts recently took a look at which investment service firms are most likely to benefit from higher interest rates. They came up with two stock picks.
2 Stocks for Rising Interest Rates These stocks are considered fairly valued. Data as of Sept. 5, 2022.
- Charles Schwab SCHW
- LPL Financial LPLA
Our first pick is Charles Schwab stock. More than 50% of Charles Schwab's net revenue is tied to interest rates, with about half of its interest-earning assets driven by short-term interest rates and the other half driven by longer-term interest rates. The firm should receive an immediate revenue lift from rising interest rates, and then sustained earnings growth as the yield of its securities portfolio tied to longer-term interest rates reprices over several years. Given its massive size and industry-leading cost efficiency, Charles Schwab has significant competitive advantages. We therefore assign the stock a wide economic moat rating. We think Charles Schwab stock is worth $84.
Our second idea is LPL Financial stock. LPL Financial should see significant operating margin expansion from a rise in short-term interest rates, as well as near-term revenue growth. In fact, we forecast that gross profit will increase about 40% over the next two years in large part because of rising interest rates. Pretax income will potentially double, too. We assign LPL Financial a narrow economic moat rating, thanks to the high retention of advisors on its platform and the stickiness of investor assets.
Watch 3 Dividend Stocks for September 2022 to learn about stocks popular with income investors.