The stock market is booming. The Nasdaq Exchange has surged to new all-time highs. Despite the worst economic numbers in more than a decade, investors have rushed into tech stocks. Now, the euphoria is spreading. The S&P 500 has also reached new highs, and crossed the 3,500 barrier for the first time ever. There’s still an opportunity though. Where? In cyclical stocks to buy.
As you’ll see below, significant chunks of the stock market still haven’t sprung back yet. Investors have gravitated to companies that have benefited from economic changes this year, but they have kept perceived losers in the penalty box. However, with the strength of the economic turnaround, even many industrial and cyclical companies could come roaring back.
With so many stocks already getting expensive over the past few months, it is time to turn our attention elsewhere. With these seven cyclical stocks to buy, opportunity is still plentiful:
- Canada Goose (NYSE:GOOS)
- Polaris (NYSE:PII)
- Honda Motor (NYSE:HMC)
- D.R. Horton (NYSE:DHI)
- Las Vegas Sands (NYSE:LVS)
- Valero (NYSE:VLO)
- Thor Industries (NYSE:THO)
Cyclical Stocks to Buy: Canada Goose (GOOS)
It is no secret that retail stocks have gotten slammed in 2020. How are apparel brands, for example, supposed to profit when people are stuck at home? Folks can’t shop at stores, nor are there nearly as many occasions that require updating one’s apparel. Still, the crisis has hit some clothing companies worse than others.
Fortunately for us, Canada Goose falls into the category of stocks that are still in the dumps, but which actually are in fine shape. Sure, Canada Goose just reported another weak quarter a few weeks ago. But really, when it is summer time, who is shopping for winter gear anyway?
That’s the good thing about how the virus has played out, at least as far as Canada Goose goes. The company lost sales in spring and summer, which were never pivotal seasons for it anyway.
Now, after months of being cooped up at home, folks are looking to plan vacations and break their cabin fever. With the time for skiing and other winter sports right around the corner, now is the time for Canada Goose to start revving up its sales engine. And consumers aren’t in bad shape thanks to all the government stimulus. There will be some cash available for indulgent spending this holiday season.
Canada Goose, with its strong direct-to-consumer channel, should be able to post a rapid recovery.
Polaris is another company that initially tumbled thanks to the novel coronavirus. Its stock fell more than 50% in the first part of the year. The company makes expensive consumer vehicles, such as all-terrain vehicles (ATVs) and snowmobiles. Many people think of these as high-priced toys, and thus they naturally come under fire during a dismal economic period.
This narrative missed two things, however. One, consumer spending has actually been fairly strong thanks to the $1,200 stimulus checks, enhanced unemployment benefits, and so on. And two, like with Thor Industries below, Polaris is benefiting from stay-at-home orders.
Polaris makes vehicles that are ideal for a Covid-19 world. Offroading and snowmobiling are among the best recreational activities that are naturally socially distanced and help folks get away from the monotony of staying at home all the time.
PII stock has been in a downtrend since 2015, as warm winter weather has hurt sales for several holiday seasons. Now, the company has a chance to reboot the narrative as folks look for safe and fun ways to start enjoying the outdoors again. And with the economy picking up, vehicles like this could be in the sweet spot as consumers make their purchases this holiday season.
Cyclical Stocks to Buy: Honda Motor (HMC)
Speaking of vehicles, auto sales are another thing that should pick up as the economic recovery gains steam. Already, the housing market has come roaring back, and is now far stronger than analysts had anticipated. Investors still are pricing in a long downturn in autos, by contrast. And sure, housing has the specific advantage of being in demand as folks upgrade their living situations after the pandemic.
However, the same general economic forces pushing the recovery may boost car sales as well. Interest rates are at record lows, so consumer financing has never been easier. The generous economic aid packages from the federal government have put a ton of extra cash in peoples’ pockets. And while the unemployment situation is still dire, jobs are coming back faster than previously anticipated.
All this adds up to a situation where the auto market could catch a major tailwind significantly faster than folks are expecting. Housing has already blasted off. If autos are the next to go, HMC stock will enjoy a swift acceleration heading into next year.
D.R. Horton (DHI)
And on the topic of housing, we have D.R. Horton. You can make an argument for owning most of the different homebuilders here. Given the boom in the housing market, and the Federal Reserve promising low interest rates for years to come, the sector should be profitable for a long time.
That said, if you want a safe pick to ride the trend, give DHI stock a look. It is one of the nation’s biggest and most-diversified homebuilders, as it currently has a market capitalization of more than $26 billion. This means you aren’t taking undue risk on any one particular geographic region of the country.
Additionally, the housing boom is showing up in D.R. Horton’s numbers. The company reported homebuilding revenues up 11% over the first nine months of its fiscal year. That is pretty remarkable, since much of the country was under lockdown orders for a good chunk of Q3. Just imagine how much momentum the company may be able to pick up with a full quarter of sales in Q4.
To that end, the company reported sales orders surging 38% during Q3, pointing to a huge growth in backlog going forward.
Earnings also soared to $1.72 per share on the quarter — that was way ahead of analyst estimates for a profit of $1.26 per share. There is no need to overthink this one. Housing is red hot right now, and homebuilders such as D.R. Horton have more upside ahead.
Cyclical Stocks to Buy: Las Vegas Sands (LVS)
Recently, traders have turned their attention to online gaming plays such as DraftKings (NASDAQ:DKNG). That is understandable. Online sports betting is a huge growth market, and whoever wins market share there is going to have a great business. However, it’s unclear when sports will be back to normal. The coronavirus could still wreak havoc on the 2020-21 seasons, and political uncertainty has sidelined the NBA and others recently as well.
With that in mind, it is worth taking a look at traditional gaming companies too. When it comes to cycles, these companies ride huge winning and losing streaks. Not only are they heavily tied to the economy in general, their properties have also been squarely under fire thanks to the pandemic
Las Vegas Sands is a particularly interesting cyclical comeback play for two reasons. One, it has heavy exposure to the Chinese market. The economic recovery there seems ahead of pace compared to the rest of the world, and the virus is under control. The Macau revenues could come surging back.
And secondly, LVS stock is still priced for the current downturn; shares change hands below where they were in June 2020 at the height of the first reopening trade. At just $51 now, Las Vegas Sands is way below the $70 level it went for before Covid-19. If you’re bullish on the broader economy returning to normal, LVS stock could be a jackpot investment.
Oil and gas have gotten crushed this year. And refining giant Valero has not been spared. However, it’s in much better shape than you might imagine. The confusion around Valero and the refineries is because they are considered energy stocks. They do sell gasoline, after all.
However, unlike the rest of the industry, Valero’s fate isn’t tied to the price of crude oil or natural gas. Rather, it makes its money selling the finished products such as jet fuel, gasoline, asphalt and petrochemicals.
As the economy picks up steam, these goods will all mount comebacks. Driving is already starting to recover again, and more and more airlines are adding to their flight schedules. Meanwhile certain niche products, such as chemicals that go into new housing construction, are already booming. Also, Hurricane Laura caused an uptick in gasoline prices.
There is a glut of oil. No one is denying that. However, there’s not necessarily anywhere near as much overcapacity in the end products space. The U.S. has kept a tight lid on new refinery construction, making existing properties more valuable. While refiners got crushed along with everything else this spring, expect them to recover far faster than other peers in the energy space.
VLO stock is still down nearly 50% off its 52-week highs, even as its earnings outlook has considerably brightened. The stock price could catch up with other recovery names in a hurry.
Cyclical Stocks to Buy: Thor Industries (THO)
Thor Industries is not a household name for many traders. However, the $5 billion market capitalization company should be on your radar. Thor makes recreational vehicles (RVs). Thus, it is in a highly cyclical industry, as RVs are somewhere between autos and houses in terms of the purchasing behavior. These are big-ticket purchases, and require consumer confidence to generate strong sales.
At first glance, then, it’s not at all surprising that THO stock is trading down by more than a third from its 2018 peak. With the economy in trouble, an RV maker may not spring to mind as a logical purchase. But think again. A surprising number of people have taken to recreational vehicles as a safe way to travel the country. You get the thrill of not being stuck in one place during Covid-19 while also not having to share your surroundings with strangers that may have the virus.
Long story short, RV sales are positively soaring. For July, for example, they hit their highest point of 2020 and are up double-digits from the same period of 2019. THO stock is now up on the year, but it is still way down from its 2018 peak. And Thor shares dipped again in August, falling roughly 12% in recent weeks. Thanks to that, the stock is now going for a measly 17x forward earnings, even as the company is picking up speed.
On the date of publication, Ian Bezek held a long position in PII.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.