Investing Club: Our favorite stocks to own as the Fed prepares to lift interest rates

Published Thu, Feb 10 20221:59 PM ESTUpdated Fri, Feb 11 20226:56 AM EST

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

For weeks, we've been preaching the importance of building a portfolio that can thrive even as the Federal Reserve begins raising interest rates to curb inflation. But Thursday's hotter-than-expected report on consumer prices now has Wall Street rethinking just how aggressive the Fed will be to tamp down on inflationary pressures. The market now firmly expects the U.S. central bank to raise rates six times this year, beginning in March. That's one more rate hike than the majority of traders were betting on earlier in the week. With that in mind, we selected four of our favorite portfolio holdings for playing a rising-rate environment. While higher rates can be bad news for speculative stocks that trade on price-to-sales ratios, that's not the case for banks like Wells Fargo (WFC). Banks benefit from higher rates because it can boost their net interest margin — basically, they can make more money on the difference between what they pay customers for their deposits and what they charge on loans. The Club has owned Wells Fargo for a little over a year now, as CEO Charlie Scharf continues to turn around the bank after a series of scandals put the firm in hot water with regulators. In addition to its interest rate sensitivity, the Club also likes that Wells Fargo announced a dividend hike last month . Wells Fargo was higher in a down market Thursday, hitting a 52-week high of $60.30. The Club has a 1 rating on the stock . It holds the second-largest weighting in the portfolio, at roughly 5.4%, trailing only Apple . Morgan Stanley (MS) is the other traditional financial stock in the Club portfolio. Morgan Stanley does not benefit from higher rates as much as Wells Fargo, but it still generates net interest income. We think it's a good play in this environment when combined with the Club's broader Morgan Stanley investment thesis. CNBC's Jim Cramer and the Club believe in CEO James Gorman 's strategy to bring consistency to the firm, broadening its focus beyond investment banking into areas like asset management. It's also buying back a lot of stock, which we also like to see. The Club has a 1 rating on Morgan Stanley shares, which were slightly higher in Thursday's session and touched a new 52-week high of $109.73. The Club also likes oil major Chevron (CVX) here, as interest rates are likely going higher. The reason? Elevated energy prices have contributed to the inflation in the economy, and that inflation is what's prompting the Fed to take action. West Texas Intermediate crude futures , the U.S. oil benchmark, were trading at more than $91 per barrel earlier on Thursday. A week ago, WTI futures crossed the $90 level for the first time since October 2014. Simply put, Chevron is able to make more money with oil trading at these levels than it would at $40 per barrel. Chevron boasts a dividend yield north of 4%, based Thursday's stock price at around $136 per share. The Club likes that dividend payout, as well as the company's investments into lower-carbon energy businesses such as renewable natural gas. Chevron shares fell 1% on Thursday but remained close to Monday's 52-week high of $139.43. The Club has a 2 rating on the stock. Devon Energy (DVN) is a relatively new holding for the Charitable Trust, and our outlook on the stock has similarities to how we evaluate Chevron. The Club views both stocks favorably with oil prices at their current levels. Devon, though, is more of a direct play on higher crude prices. We believe Devon's dividend strategy is especially attractive. In addition to its fixed quarterly dividend, Devon also has a variable component. It is calculated each quarter after the fixed dividend is funded, and can amount to 50% of Devon's excess free cash flow. Shares of Devon were higher Thursday but still slightly below Friday's 52-week high of $55.44. The Club has a 1 rating on the stock, and it has weighting in the portfolio of nearly 1%. (Jim Cramer's Charitable Trust is long CVX, DVN, MS, WFC and AAPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A pedestrian wearing a protective mask walks past a Wells Fargo & Co. bank branch in New York, U.S., on Thursday, July 9, 2020.

Peter Foley | Bloomberg | Getty Images

For weeks, we've been preaching the importance of building a portfolio that can thrive even as the Federal Reserve begins raising interest rates to curb inflation.