It is time for investors to face the facts. An interest rate hike is coming sooner rather than later, with some speculating that a hike could come as early as next month. While the market is still pricing a low chance of this happening, investors are starting to think that one could happen this summer, with recent readings of the CME FedWatch suggesting we are more likely than not to see a hike in July.
However, it has been a long time since we were in a rising rate environment, so some investors might not remember what the best sectors are in this scenario. One sector that tends to benefit is the financial space, with the insurance industry often leading the pack. That is why I am looking to a top ranked stock in this sector, Cincinnati Financial (CINF – Analyst Report) , as one to keep on your radar in the short-term.
Why Insurance?
Cincinnati Financial, like other companies in the insurance segment, takes in premiums from clients and then invests that cash in securities. The idea here is that the income or return earned on the investment portfolio more than makes up for any losses from the insurance policies written, allowing companies to profit from the spread between the two.
CINF and others in the space usually invest a large portion of their portfolio in bonds, so a rate hike would be great news for companies in this space. After all, any future premiums invested in bonds will have higher payouts once rates start to rise, directly contributing to insurance companies’ bottom line. This makes insurance a great place to be in a rising rate environment, but why look to CINF in particular?
Why CINF
Cincinnati Financial has been seeing rising earnings estimates as of late, for both the short term and the long term. In fact, we haven’t witnessed any revisions lower for the current quarter or the current year in the past sixty days, while we see a similar trend for the next year too.
But it isn’t just that we have been seeing rising estimates lately, the pace of these increases has also been impressive as well. In just the past month, the current quarter estimate has increased by over 12%, while the full year and next year estimates have both moved higher by over 7.4%.
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