How to Prepare for a Rate Hike?

It is widely believed that the Federal Reserve will hike interest rate this week, marking the first hike in almost nine years. With the Fed expected to hike interest rates, I think investors should brace for a market correction and increase their cash position by selling their profitable stocks. In this article, I will look back at some of the most profitable stocks that I have recommended in 2015.

Starbucks (SBUX)

Anyone who has been following me knows that I absolutely love Starbucks’ business model and call it the Apple of coffee.
I have recommended the stock three times in 2014 and a few more times before that and my calls have yielded double-digit returns.

While I really like the company, I think investors should consider selling the stock going into the rate hike and wait for a better entry point if the stock falls. The primary reason why I think investors should book profit is because of Starbucks’ valuation. Starbucks’ metrics are a bit stretched as the company is trading at a P/E ratio of almost 33.

Starbucks has benefited from the bullish economy, however a rate hike may prevent consumers from regularly spending $5 on coffee. Hence, I think investors should sell the stock and book profit.

Ulta Salon (ULTA)

Like Starbucks, I also like Ulta Salon’s business model. Ulta’s shares have grown consistently over the last few years, but the upward trajectory may soon end. Resembling Starbucks, Ulta also has a stretched valuation and is currently trading at a trailing P/E multiple of 40. Although the company is still in great shape, a rate hike can push the stock lower due to its expensive valuation. Going into the week, I think investors should sell Ulta and book a healthy profit.

Buffalo Wild Wings (BWLD)

I have recommended Buffalo Wild Wings twice, and although my July call has been unprofitable, the average return of both the calls has been positive. Buffalo Wild Wings is a good company and it is slowly expanding internationally. However, the company’s valuation is a bit ahead of its fundamentals and investors should sell the stock and book profit

Buffalo Wild Wings is trading at a P/E of almost 34 and a rate hike could push the stock downwards, making it a sell.

Conclusion

A rate hike will likely have a negative impact on the market and I would advise investors to sell the stocks that are trading at a premium valuation. I have recommended buying the three aforementioned stocks and while my calls have been profitable, I think the companies are overvalued. Hence, I think investors should sell them  and wait for a better entry point going forward.
Published on Dec 15, 2015
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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