Fed’s Twist Helps Industrials With Debt, Less So Housing and Consumer Stocks

The Federal Reserve’s decision to “twist” its portfolio toward holding more long-term and less short-term securities is intended to help jump-start the economy. But the move also validates fears that the economy is weakening. Lower long-term rates don’t lift all boats.

In particular, record low mortgage rates hardly are sparking a boom in the housing market, as income growth remains AWOL and homeowners can’t refinance houses worth less than their outstanding mortgage debt.

10 Year Treasury Rate Chart by YCharts

Stock investors looking for an investment play in the Fed’s portfolio twist need to turn away from interest-sensitive stocks in the housing and consumer sectors and toward solid industrial companies that rely on long-term debt.

The railcar leasing business, for example, has performed surprisingly well in the weak economy, as interest rates have fallen. An otherwise odd comparison that proves the point matches the return on invested capital at homebuilder KB Homes (KBH), which reported a wider-third quarter loss last week (9/22), and railcar lessor GAXT (GMT).

KB Home Return on Invested Capital Stock Chart by YCharts

Another way to see the picture compares the one-year return on the NYSE 10-year Treasury price index with comparable returns for GATX and KB Homes.

NYSE Current 10 Year US Treasury Index Chart by YCharts

Overall, U.S. freight activity, including truck and barge, has been on the mend for two years. That means steady business for companies that lease freight rail cars and other freight delivery equipment.

The terms of leases and lease renewals tracks closely with long term interest rates. At GATX, the average lease term is 5 to 7 years. The average age of the fleet under GATX leases is 15 to 17 years. Only 20% of the company’s debt carries a variable rate.

GATX holds an investment-grade triple-B long-term credit rating from Standard & Poor’s and a comparable rating from Moody’s. As a result, GATX has reliable access to capital, despite the highly cycle nature of the rail car business. The company has been adding long-term debt as bond yields drop, even as it trims its ratio of short-term debt to current assets.

Gatx Corporation Long Term Debt Stock Chart by YCharts

By contrast, KB Homes has a speculative-grade (junk) credit rating. The Fed’s twist is unlikely to boost KB Home’s creditworthiness any time soon.

GATX, which is rated “attractive” by YCharts, has seen is profit margin slip but GATX’s dividend yield has held steady at more than 3 percent.

Gatx Corporation Dividend Yield Stock Chart by YCharts

KB Homes is rated “avoid.”

Bill Barnhart is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.