Doug Kass Picks Winners On Rising Interest Rates

Thursday, 22 Mar 2012 | 5:45 PM ET

Rising interest rates will mean a new batch of winners and losers, Seabreeze Partners President Doug Kass said Thursday.

First, Kass identified companies with large debt-to-equity ratios as the biggest losers.

Most vulnerable were telecom, media and materials, such as Pitney Bowes, CenturyLink, PPL and CMS Energy.

Next were “high yielders.”

Profit Margin Pressure & Interest Rate Exposure
Is the great bond bull trade over? Doug Kass, Seabreeze Partners, discusses his outlook on corporate profit margins and why he believes S&P 500 earnings are likely to fall short relative to consensus forecasts. Also, the winners and losers in a rising rate environment.

Rising interest rates would mean returns from these companies would become less competitive.

Plus, there was another potential headwind.

“If you consider the proposals by the Obama administration to nearly triple the tax on dividends, it’s going to make the dividends less valuable,” Kass said on “Fast Money.”

Frontier Communications, Windstream and Gannett were in this category.

Third, Kass identified losing sectors and companies as those that had benefited from low interest rates but were now facing shrinking margins, such as homebuilders.

Kass said research on any particular company was necessary but had general advice.

“It’s best to take advantage of the strength of last 2½ years and sell them,” he said.

But who’ll benefit from rising rates?

“The most obvious winners are banks,” Kass said, adding that he would stay away and sell them on their strength.

Other winners were insurance companies, “which had been suffering,” and “less obvious areas like discount brokers.”

“These companies not only benefit from a rotation out of bonds into stocks, but they have these large money balances, so their net interest margins will explode,” he said.

Overall, Kass said the economy would continue to “muddle through” for the time being.

“I don’t believe interest rates will rise because of a vigorous economic recovery,” he said, forecasting 1½ percent GDP growth in the near future.

“We’re going to see a flight to safety in bonds,” he said. “That will be the main factor that leads to a rise in rates.”

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Trader disclosure: On March 22, 2012, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders: Joe Terranova is long VRTS; Joe Terranova is long NXPI; Joe Terranova is long IBM; Joe Terranova is long MCD; Joe Terranova is long EMC; Joe Terranova is long MSFT; Joe Terranova is long JOY; Joe Terranova is long OXY; Joe Terranova is long LQD; Joe Terranova is long POT; Joe Terranova is long TBT; Joe Terranova is short APRIL GOLD FUTURES; Joe Terranova is short MAY SILVER FUTURES; Guy Adami is long C; Guy Adami is long GS; Guy Adami is long INTC; Guy Adami is long AGU; Guy Adami is long MSFT; Guy Adami is long NUE; Guy Adami is long BTC; Anthony Scaramucci is long AAPL; Anthony Scaramucci is long BAC; Anthony Scaramucci is long C; Anthony Scaramucci is long IBM; Keith McCullough is long xlu; Jim Rogers is long GRAINS; Jim Rogers is long CHINA; Jim Rogers is long SILVER; Jim Rogers is long GOLD; Doug Kass is long TBT; Doug Kass is long TBT CALLS; Doug Kass is long ETFC; Doug Kass is long SCHW; Doug Kass is long LOW; Doug Kass is long BRK.B

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