2 Stocks for Rising Interest Rates

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.

1. Charles Schwab SCHW
2. 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.