Interest rates remained depressed for more than a decade after the Great Recession, in 2009. However, they have begun to rise this year, mostly thanks to the unprecedented fiscal stimulus packages offered by the U.S. government in response to the pandemic. These fiscal packages have also led inflation to jump to a 30-year high lately.

As a result, the Fed is likely to begin raising interest rates at some point in 2022. Higher interest rates provide a strong tailwind to the financial sector, as they enhance the net interest margin of banks, i.e., the difference between the interest they earn from loans minus the interest they pay on deposits.

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In this article, we will analyze the prospects of three highly attractive financial stocks.

Lazard (LAZ)

Lazard is an international investment advisory company, which was founded in 1848. It has two business segments, namely Financial Advisory and Asset Management. The Financial Advisory business includes M&A, debt restructuring, capital raising, and other advisory business. The Asset Management business is about 80% equities and focuses primarily on institutional clients.

Most financial companies saw their earnings decrease significantly last year due to the coronavirus crisis, which caused a severe global recession and thus exerted great pressure on many customers of financial companies.

However, Lazard proved markedly resilient. The company greatly benefited from some effects of the pandemic, namely the increased need of companies for debt restructuring and the great number of mergers, which resulted from the opportune valuations of some companies and their need to become more efficient via consolidation amid the pandemic. In addition, Lazard enjoyed a tailwind from the unprecedented stimulus packages offered by most countries in response to the pandemic and thus it grew its assets under management by 4% in 2020.

Even better, the business momentum of Lazard has accelerated this year. In the third quarter, the company grew its revenue 23% over last year’s quarter and its earnings per share 46%, from $0.67 to $0.98, thus exceeding the analysts’ consensus by $0.03. Lazard is on track to grow its earnings per share by approximately 28% this year, from $3.60 to a new all-time high of $4.60. Moreover, the positive business momentum is likely to remain in place in the upcoming quarters, as Lazard is currently involved in the debt restructuring process of several companies and countries.

In the mid-term, Lazard has exciting growth prospects thanks to increased M&A activity, many cases of debt restructuring and growing assets under management.

M.D.C. Holdings (MDC)

M.D.C. Holdings has two primary operations, homebuilding and financial services. Its homebuilding operation purchases finished lots or develops lots to the extent necessary for the construction and sale of single-family detached homes to homebuyers under the name “Richmond American Homes.” Its financial services operation issues mortgage loans primarily for the homebuyers of the company while it also sells insurance coverage.

Thanks to its affordable prices and its build-to-order model, M.D.C. Holdings is ideally positioned to benefit from the ongoing impressive pent-up demand for housing, which has resulted from the ongoing recovery of the economy from the pandemic.

In the third quarter, the company grew its home sale revenues 26% over last year’s quarter thanks to higher units sold and higher selling prices. Thanks to economies of scale, its earnings per share grew 48% and exceeded the analysts’ estimates for a sixth consecutive quarter. Moreover, the company is on track to grow its earnings per share by more than 50% this year, to a new all-time high.

Furthermore, management has stated that demand is likely to remain strong for the foreseeable future. The company has a strong backlog, which bodes well for its growth potential, while there are absolutely no signs of fatigue on the horizon. As a result, M.D.C. Holdings is likely to keep posting new all-time high earnings in the upcoming years.

The company has performed impressively during the coronavirus crisis, with record earnings in each of the last two years. The resilience of M.D.C. Holdings to the pandemic should be partly attributed to the unprecedented fiscal stimulus packages offered by the government in response to the pandemic.

Artisan Partners Asset Management (APAM)

Artisan Partners Asset Management is a global investment management firm, which provides a broad range of high-value asset investment strategies across several asset classes. It has a somewhat short performance record, as it executed its initial public offering in 2013.

Artisan greatly benefits from the fiscal stimulus packages of the government and the rally of the stock market off its bottom early last year. The effect of these tailwinds are clearly reflected in the business performance of Artisan.

In the third quarter, the assets under management of Artisan skyrocketed, from $134 billion in last year’s quarter to $174 billion, thanks to $4.5 billion of new cash flows from clients and $35.5 billion of investment returns, which resulted primarily from the rally of the stock market. As a result, the company grew its revenue 36% and its earnings per share 48%. Thanks to its sustained business momentum, Artisan is on track to grow its earnings per share by approximately 50% this year, to a new record level.

Artisan has been extremely shareholder-friendly in each of the last six years. The company has targeted a dividend payout ratio around 80% and hence it has offered markedly generous regular dividends to its shareholders. In addition, it has offered material special dividends every year since 2015. Overall, the stock has offered a total dividend yield around 10% in each of the last six years. Therefore, Artisan is an interesting candidate for the portfolios of income-oriented investors.

Final Thoughts

Rising interest rates provide a strong tailwind to the profitability of most financial stocks. As a result, these stocks are likely to enjoy a double tailwind in the near future; higher earnings and a higher price-to-earnings ratio, as the stocks will be favored by the market. Lazard, M.D.C. Holdings, and Artisan are firing on all cylinders right now, with record earnings, and are trading at attractive valuation levels. As a result, they are great candidates for the investors who want to benefit from the promising prospects of the financial sector.