It has been a bumpy few months for investors this summer. Worries about trade tension between the U.S. and China took many sectors lower despite strong economic data from the U.S. Many have started prepping their portfolios for a downturn should President Donald Trump drag the U.S. into a full-fledged trade war with Beijing.
Cyclical stocks have been some of the hardest hit by the trade concerns as investors look for safe havens that won’t feel the pressure should the U.S. economy take a turn for the worst.
However, now could be a great time to pick up cheap cyclical stocks if you’re willing to ride out a bit of turbulence. Of course, there’s a chance that trade tensions will continue to escalate and things could become ugly, but the majority of analysts don’t see that happening as it would be in both countries’ best interests to work things out before escalating things further.
On a more positive note, the tensions between the U.S. and China have brought valuations back down to earth for a wide variety of sectors. That has offset some enthusiasm from positive earnings and could set brave investors up for some massive gains if the trade-war fears blow over.
With that in mind, here’s a look at five cyclical stocks you might consider adding to your portfolio.
Cyclical Stocks to Buy: Micron (MU)
Memory chip maker Micron Technology (NASDAQ:MU) had been having a pretty good run over the past few months, but MU stock saw a 15% decline in June as investors pulled out over trade war fears. Micron makes three different types of memory chips — NAND flash producers, DRAM and 3D Xpoint, a memory technology it has been producing in tandem with Intel (NASDAQ:INTC).
DRAM has been the biggest driver of Micron’s success, making up 70% of the company’s overall revenue. Because demand for DRAM tends to be cyclical, investors have also been cautious of MU stock because they’re worried about a downturn in demand.
However, the tech space is evolving rapidly and many believe that demand for MU chips won’t be as cyclical as it once was because memory needs will continue to rise as innovation continues. MU CEO Sanjay Mehrotra says DRAM is expected to see compound annual growth of 20% over the next four years, suggesting that prices are likely to remain intact for the foreseeable future.
Would MU be affected by a full-scale trade war? Of course it would — especially considering that one of its biggest competitors is Samsung, which has been working together with Beijing to moderate memory technology prices. However, the bottom line for China is that it needs to buy chips from companies like Micron in order to continue expanding the cloud computing industry — lending yet another reason for the trade war to be short-lived.
Cyclical Stocks to Buy: Honeywell International (HON)
Honeywell International (NYSE:HON) is another cyclical stock that’s worth considering right now despite ongoing trade tension. HON stock has fallen as much as 12% from 2018 highs as investors questioned whether or not the firm could continue to grow its revenue through its current product portfolio. Over the past five years, HON has only been able to eke out annual growth of around 1.5%, which has left investors less than satisfied.
However, the company is in the midst of a turnaround plan — management is hoping to offload its underperforming businesses and has been on a mission to acquire new, higher-margin businesses. Luckily for HON, many of its biggest sellers generate an incredible amount of cash, which leaves the company with a lot of spending power to use on revitalizing the business.
On the down side, HON stock is relatively expensive for a cyclical stock with a P/E of 65. However if the firm’s turnaround initiatives are successful, the company is likely to make its way well above $160 over the next year, giving investors a significant amount of upside.
Cyclical Stocks to Buy: General Motors (GM)
U.S. automaker General Motors (NYSE:GM) has had a tough few years as the company endured a series of peaks and troughs while management worked to get the business back on track. Now it looks to be on solid footing, with management expecting to see the business accelerate significantly during the second and third quarters.
Of course, GM has been hurt by trade tension with China, especially considering part of the firm’s growth strategy was a new truck launch in China and South Korea.
But despite that, GM has a lot going for it. The firm is expecting to see U.S. auto sales continue to rise, and at below $40 per share it looks undervalued. Investors who are willing to ride out the trade war bumps can take comfort in a 3.8% dividend yield as well.
Cyclical Stocks to Buy: Home Depot (HD)
Do-it-yourself superstore Home Depot (NYSE:HD) is another great pick when it comes to cyclical stocks because even though the firm depends heavily on a strong economy and has been closely linked to a strong housing market, it offers investors a good blend of income and growth.
Even though HD would lose ground in another housing market crash, the firm has proven itself to be resilient in times of trouble. Investors should take comfort in management’s ability to navigate through choppy waters. Plus, the firm has been working on new ways to shore up HD’s place in the e-commerce space, which should help protect the company somewhat in the case of an economic downturn.
The stock was beaten down after weaker-than-expected earnings, but many believe that the negativity was overdone, which should give the firm a chance to rebound this earnings season. Plus, the company is expected to grow its annual sales to more than $120 billion by 2020, making it a solid long-term bet.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
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