Higher for Longer: This Stock is Okay with That
The Federal Reserve held the line on interest rates on Wednesday, leaving the federal funds rate unchanged at a range of 5.25% to 5.5% for the second straight meeting. The market moved higher on the lack of action, perhaps hoping that the rate tightening may finally be over, although Federal Reserve Chair Jerome Powell left the door open for future rate hikes if necessary.
Many economists and investors foresee a “higher-for-longer” scenario. In other words, while rates might not go up, they may hold steady until well into 2024 before starting to go down. While that scenario may not be ideal for some stocks, it would probably be just fine for Federated Hermes (NYSE:FHI).
Federated sees record money market fund assets
Federated Hermes is one of the largest money market fund managers, but unlike some of the other leaders in the space, like Fidelity and Vanguard, the bulk of Federated’s assets are in money market funds. Thus, this high interest rate environment has been a boon for Federated, as higher interest rates mean higher yields on money market funds, and higher yields on money market funds mean more investors and assets.
According to the Crane 100 Money Fund Index, the average seven-day yield for money market funds is 5.19%, which is the highest it has been since 1999. It is safe to say that this is the best market for money market funds in more than 20 years.
It is made better for Federated due to the fact that stock markets have been down nearly 10% since July. Thus, while in the first half of the year, when stocks were soaring, people were investing in the stock market, even though money market yields were good. However, now that the market is down and there is uncertainty ahead, investors have been flocking to money markets, where they know they can get a safe return of 5% — rather than take their chances with a potentially volatile stock market.
Federated’s third-quarter results reflect that, as its total assets hit a record $715 billion, up 15% year over year. The firm’s money market fund assets also hit a record $525 billion, up 19% year over year. This resulted in a revenue increase of 6% to $403 million and an 8% jump in net income to $75 million in the quarter.
“Record assets under management at the end of the third quarter were again driven by money market asset increases, particularly investor demand for our prime money market offerings in the current interest rate environment, where general market volatility made the improved yields of our cash offerings an appealing haven for investors,” said Federated President and CEO J. Christopher Donahue.
More high yields ahead
The favorable trends for money market funds are one great reason to take a look at Federated. If the economy goes south, as some predict, the safety of money market funds will be even more important. If the Fed maintains a higher-for-longer stance, then yields should remain near record levels.
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The other great thing about Federated is that its valuation is depressed, with a price-to-earnings (P/E) ratio down to 10 from 12 a year ago and a forward P/E ratio of 8.9. The stock price is down about 13% year to date, mainly because of the bull market in the first half of the year.
However, with the bulls likely not running again for the foreseeable future, analysts are bullish on Federated, giving it a consensus price target of $38 per share, which is 20% higher than its current price.
Thus, if you’re looking for a safe, solid option in this uncertain time, Federated is one stock to consider.