Here's a stock-buying strategy now that rates are lower again

Published Thu, Jul 22 20212:47 PM EDT

The low interest rate environment could be an opportunity for investors, as companies buy back their stocks using cheap debt and later return capital to their shareholders, according to Wells Fargo Securities. The 10-year Treasury yield dropped to a five-month low on Monday , unnerving some equity investors about a possible slowing of the economy due to spreading Covid variants. The benchmark yield has stabilized around 1.25%. Yet, Wells Fargo Securities told investors to embrace low interest rates. "Investors should not interpret these low rates as a signal that economic growth is meaningfully impaired and that it is time to take shelter in the work-from-home bunker," Christopher Harvey, senior equity analyst at Wells Fargo Securities told clients in a note. For the second half of 2021, the firm favors stocks and strategies "that can capitalize on an artificially low cost of capital," Harvey added, which includes greater exposure to buybacks, mergers and acquisitions, real estate investment trusts and some housing. The firm said the "obvious" answer for corporations is to issue debt and repurchase shares or other firms. "For portfolio managers we see a few possibilities and almost all are related to leverage and/or low funding costs: Increase exposure to companies buying back shares, broker-dealer or M & A candidates, REITs, and to a less degree housing," said Harvey. To ride the buyback theme, Wells Fargo Securities screened for stocks taking advantage of buybacks in the low rate environment. Many of the companies pass Wells Fargo Securities' risk parameters and have reasonable exposure to the reopening. "Lastly and most importantly, we would expect these firms to perform better in a down tape than many other stocks since buyback executions often accelerate during sell-offs," added Harvey. The listed stocks all have an overweight rating from Wells Fargo Securities. Consumer discretionary names on the list include Yum! Brands , Starbucks and Ralph Lauren. In May, Yum! Brands approved a new $2 billion buyback plan through December 2022. Energy names on the list include Marathon Oil and Valero Energy . PNC Financial , Bank of America and US Bancorp are the financials that make the buyback screen. PNC Financial announced last month a 9% increase to its dividend and a $2.9 billion stock buyback program. Meanwhile, in April, Bank of America announced a $25 billion stock repurchase program over time. Norfolk Southern , Applied Materials , DuPont de Nemours , LyondellBasell Industries and Celanese also earned spotted on Wells Fargo Securities' list. — with reporting from CNBC's Michael Bloom.

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