Michael Farr on how to invest in an era of rising rates and living with COVID

Big tech with strong fundamentals

Much of the pain this year has come from the technology sector: The tech-centric Nasdaq is down almost 11% in 2022, while the blue-chip heavy Dow is off just 3.8%.

But Farr reminds investors that not all tech stocks are created equal, with some carrying greater risks than others.

“During a rising rate environment, the higher multiple growth stocks and those more speculative stocks that ... trade on (their) price to sales (ratio) because there are no earnings, those stocks suffer.”

On the other hand, large-cap tech stocks with rock-solid balance sheets offer investors a chance to go for growth in a relatively risk-averse fashion. One such stock that Farr singled out is Google parent Alphabet.

“Alphabet is executing very well and it’s one I’ve owned for a very long time.”

Alphabet delivered a solid report this earnings season. In Q4, revenue grew 32% year over year to US$75.3 billion. Meanwhile, earnings per share surged 38%.

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Consumer staples

Businesses that sell the basics like food and household products aren’t exactly sexy, but they can provide a steady way to make gains no matter what the economy is doing.

“I always like the consumer staples as a defensive group,” Farr said. “I love my Pepsi-Colas of the world, they tend to do well.”

With massive brands like Pepsi-Cola, Mountain Dew, Lay’s, and Quaker in its portfolio, PepsiCo’s products continue to be on millions of shopping lists around the world.

In the latest quarter, PepsiCo’s revenue grew 11.6% to US$20.2 billion, thanks to a double-digit increase in beverage volume.

But it’s PepsiCo’s dividend history that gives us the best insight into the business model’s durability: The company has raised its cash dividend every single year for the past 49 years.

If you don’t want to pick individual stocks, low-cost ETFs that invest in a broad range of consumer staples companies are smart options.

Names like the Consumer Staples Select Sector SPDR Fund (XLP) and the Vanguard Consumer Staples ETF (VDC) should provide a good starting point for further research.

Financials

Farr likes financial stocks as well. And it’s not hard to see why.

Tighter monetary policy is likely coming. With inflation running hot, the Fed is expected to raise interest rates multiple times this year.

Many businesses fear rising interest rates. But for certain financials, like banks, higher rates are a good thing.

Banks lend money out at higher rates than they borrow at, pocketing the difference. As interest rates increase, this earnings spread widens.

Banking giants are also well-capitalized right now and have been busy returning money to shareholders.

Last year, Bank of America boosted its quarterly payout by 17% to US$.021 per share. Morgan Stanley doubled its quarterly dividend to 70 cents per share. And JPMorgan increased its quarterly rate by 11% to US$1 per share.

Investors can also get exposure to financial stocks through ETFs like the Financial Select Sector SPDR Fund (XLF) and the Vanguard Financials ETF (VFH).