{"id":66307,"date":"2023-09-28T05:28:59","date_gmt":"2023-09-28T09:28:59","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/the-yield-curve-is-improving-these-types-of-stocks-should-benefit\/"},"modified":"2023-09-28T05:29:02","modified_gmt":"2023-09-28T09:29:02","slug":"the-yield-curve-is-improving-these-types-of-stocks-should-benefit","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=66307","title":{"rendered":"The ‘Yield Curve’ Is Improving. These Types of Stocks Should Benefit."},"content":{"rendered":"
\n

The\u00a0<\/strong>relationship between the yields on short- and long-term bonds is normalizing after being more topsy-turvy earlier in the year. That\u2019s a positive signal for the economy, and it that means select groups of stocks will benefit.\u00a0<\/p>\n

The \u201cyield curve\u201d is a term to describe the difference between the yields on short- and long-term bonds. Normally, the longer-term yields are higher to compensate bond investors for the risk of inflation over time, so the yield curve would reflect a positive number. But right now, longer-term yields are below short-term yields. That\u2019s because the Federal Reserve has lifted short-term interest rates to cool economic demand and the rate of inflation. <\/p>\n

\n

The yield on the
\n 10-year Treasury
\n is at about 4.51%, while the
\n 2-year Treasury yield
\n is at about 5.07%. That\u2019s a negative 0.56% differential for the yield curve.<\/p>\n

The difference was even steeper earlier this year. In early March, the yield curve hit a low of just over negative 1%. Since then, the bond market has gotten more optimistic that economic demand may not sink that much over the long-term. <\/p>\n

To be sure, concerns about the economy aren\u2019t completely going away, but the 10-year yield has risen substantially in the past several months. After all, many areas of the economy have recently seen growth since the same time last year, and the recession that people had been taking about hasn\u2019t arrived.\u00a0<\/p>\n

In this scenario, value stocks are likely to perform well enough, as long as the yield curve continues to improve. Value companies are more mature in their life cycles, so their profits are more influenced by changes in economic demand. In contrast, high-growth firms are still scaling their businesses, so their financial results are more influenced by the rate of adoption of their products and services.<\/p>\n

Already, the
\n Vanguard S&P 500 Value Index
\n exchange-traded fund (ticker: VOOV) has performed decently, gaining just over 2% since early March, while the
\n Russell 2000 Growth Index
\n down is a touch since then.\u00a0<\/p>\n

\u201cWhile yield curves are biased steeper\u2026being long value\u2026will make sense,\u201d writes 22V Research\u2019s Dennis DeBusschere.\u00a0<\/p>\n

Still, there are some growth stocks that are worth owning for the long-term even if value also rallies. The good ones aren\u2019t the smaller, less profitable ones on the Russell 2000. Those stocks are risky because some of the companies may still need to raise money and borrow at an elevated cost. Those stocks also trade at high price-to-sales multiples, some close to 10 times sales, so they\u2019re vulnerable to large drops. <\/p>\n

Larger \u201cgrowth at a reasonable price,\u201d or \u201cGARP stocks,\u201d are better bets, DeBusschere says.\u00a0<\/p>\n

These GARP stocks are companies that are not only profitable already, but they\u2019re still growing earnings faster than the average company. It isn\u2019t likely that the real economic growth that would accompany an improving yield curve would be much higher than low single digits in the next few years, according to FactSet, so some GARP stocks can still perform even better than some value stocks.<\/p>\n

\n Netflix
\n (NFLX) is an example that fits the description. It\u2019s still seeing streaming adoption internationally, and it\u2019s adding advertising into some subscription plans at home. It should expand profit margins as sales increase, and analysts forecast annual earnings per share growth of about 23% over the next three years. It trades at just under five times sales estimates for the next 12 months.\u00a0<\/p>\n

\n Alphabet
\n (GOOGL) is another example. It\u2019s seeing higher cloud adoption with the advent of artificial intelligence. It\u2019s is also using AI in advertising, where it could raise ad rates as the platform drives better results for brands. Analysts are looking for 10% annual sales growth for the next three years and low teens EPS growth. The stock trades at about five times sales.\u00a0<\/p>\n

Both tech stocks are up more than 20% since early March.\u00a0<\/p>\n

The market has become a tricky one to navigate. All of these stocks have a strong shot to perform well over the next few years. <\/p>\n

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

The\u00a0relationship between the yields on short- and long-term bonds is normalizing after being more topsy-turvy earlier in the year. That\u2019s a positive signal for the economy, and it that means select groups of stocks will benefit.\u00a0 The \u201cyield curve\u201d is a term to describe the difference between the yields on short- and long-term bonds. Normally, […]<\/p>\n","protected":false},"author":1,"featured_media":66308,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-66307","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-markets","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nThe 'Yield Curve' Is Improving. 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