Stocks to buy

3 Stocks That Will Surge in 2023 as Fed Rate Hikes Continue

With the new year just around the corner, it’s a good time to look at attractive stocks to buy. There need to be some portfolio adjustments based on potential monetary policy action.

An era of artificially low-interest rates is over. The Federal Reserve has pursued aggressive contractionary monetary policies since March. There is a big possibility that tight money policies will sustain in 2023, and inflation will remain relatively stubborn.

It goes without saying that the tight money policy has impacted equities. Growth stocks have witnessed a significant correction. At the same time, there are investment themes that are expected to perform well amidst the rate hike.

Coming back to expectations of the rate hikes, Patrick Leary, a senior trader with Loop Capital Markets, believes the Fed is eyeing a terminal rate of about 5.25%. There is also a consensus that the Fed will keep rates high through 2023.

With this overview, let’s talk about three stocks to buy that will surge in 2023 as the Fed rate hike continues.

Ticker Company Price
NEM Newmont Corporation $45.60
JPM JPMorgan Chase $130.06
RIO Rio Tinto $68.86

Newmont Corporation (NEM)

Source: Piotr Swat/Shutterstock

There are two important reasons to be bullish on gold for 2023. First and foremost, expectations of a rate hike imply that inflation will be relatively stubborn. Gold might continue to trend higher after bottoming out at around $1,600 an ounce in 2022. Furthermore, several economists believe that there is a possibility of a recession in 2023. Investors will seek refuge in hard assets like gold and bonds.

Newmont Corporation (NYSE:NEM) is among the top stocks to buy. A big reason to like Newmont is the company’s investment-grade balance sheet. A strong cash buffer and healthy cash flows will ensure that dividends sustain. NEM stock also trades at attractive valuations after a correction of almost 25% for year-to-date 2022.

Newmont is also attractive from an asset perspective. The company has 96 million ounces of proven reserves. There is clear cash flow visibility with expectations of stable production through the 2040s. Newmont also expects the all-in-sustaining cost to decline in the coming years. This will boost the EBITDA margin and translate into cash flow upside.

JPMorgan Chase (JPM)

Source: Daryl L / Shutterstock.com

Banking stocks have been subdued through 2022. However, net interest income margin expansion will continue with the rate hikes. This is a positive catalyst for banks. It’s, therefore, not surprising that JPMorgan Chase (NYSE:JPM) stock has trended higher by 14% in the last six months. With the stock trading at a forward price-earnings ratio of 11.2, there is potential for further rally. JPM stock also offers an attractive dividend yield of 3.0%.

It’s worth noting that JPMorgan posted a record net interest income for Q3 2022. The bank has also reaffirmed its guidance for the full year. The bank’s CEO also pointed out that consumers and businesses have remained healthy.

Between 2004 and 2007, the Fed increased interest rates. During the same period, credit growth accelerated. Therefore, a rate hike does not necessarily imply that credit growth will be muted. I, therefore, remain bullish on the bank’s core business growth in 2023. This is likely to offset some depression in the investment banking business if equity market conditions remain challenging through the next year.

Rio Tinto (RIO)

Source: Rob Bayer / Shutterstock.com

With inflation likely to remain high, industrial commodity stocks will also likely be performers. It’s also worth noting that with recession fears, China might pursue a stimulus package to boost economic activity. This will be positive for iron ore, among other industrial commodities.

Rio Tinto (NYSE:RIO) is a quality stock pick for 2023. At a forward price-earnings ratio of 7.9, the stock is undervalued. RIO stock also offers investors an attractive dividend yield of 9.85%.

From a financial perspective, Rio Tinto reported a free cash flow of $7.1 billion for the first half of 2022. Cash flows have remained robust even with some decline in commodity prices. With a strong balance sheet, dividends are likely to sustain.

At the same time, Rio Tinto plans to invest $9 to $10 billion annually in the next two years. These investments will translate into revenue and cash flow upside.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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