When it comes to tried-and-true market trends, one you can pretty much bank on is that cyclical stocks are risky when the economy is weak, but great when the economy is on the mend.
History proves this trend is rarely, if ever, defeated and that’s good news for investors right now. Obviously, the bad news right now is that the U.S. economy is technically in a recession owing to the novel coronavirus pandemic. But the good news is that the world’s largest economy is showing signs of recovery, perhaps inviting investors to embrace cyclical stocks.
“We suspect the rest of the year for equity investors will be about stock picking and getting the style shifts correct,” Morgan Stanley said in a recent note. “We continue to prefer cyclicals over defensives.”
With that in mind, here are some cyclical names to consider into the end of the year:
- Camping World Holdings (NYSE:CWH)
- VICI Properties (NYSE:VICI)
- Dow Chemical (NYSE:DOW)
- JPMorgan Chase (NYSE:JPM)
- Penn National Gaming (NASDAQ:PENN)
- Etsy (NASDAQ:ETSY)
- American Express (NYSE:AXP)
Cyclical stocks typically hail from four sectors: consumer discretionary, financial services, materials and real estate, though it’s not a stretch to add industrials to the mix, too.
Camping World Holdings (CWH)
Camping World Holdings is proving its mettle as a consumer discretionary pandemic play that’s not rooted in e-commerce or online retail. Rather, CWH stock is up more than sevenfold this year, a performance driven in large part by consumers’ shifting tastes in vacation options. Why get on a plane and risk coming into contact with someone that may have Covid-19 when the (more economical) great outdoors beckons?
A run such as as the one Camping World has been on does open the door for some near-term retrenchment, as seen by a 17% pullback over the past month, but there’s still a strong fundamental case here. The company recently said it believes it can grow earnings before interest, taxes, depreciation and amortization by a mid-single digit rate over the next five years. The further projected 2021 EBITDA should be $500 million, up from a previously forecast range of $460 million to $490 million.
Confirming a stout cash position, Camping World recently declared a quarterly dividend and boosted a special dividend by 75%. The stock closed around $30 on September 18, but the average analyst price target is $38, with one analyst forecasting a move to $40.
VICI Properties (VICI)
I highlighted VICI Properties about a month ago and over that time, the gambling real estate investment trust (REIT) is up 3% and announced an 11% dividend hike. The stock currently yields 5% and its year-to-date loss is significantly less worse than traditional REIT benchmarks.
There’s still a good chance that retail and office REITs, owing to trends foisted upon by the industry by Covid-19, have downside ahead. The opposite could be true of VICI. The worst is behind the gaming industry and VICI has had next to no problems collecting rent from its tenants during one of the worst scenarios to hit casino companies since the global financial crisis.
Additionally, the REIT is only scratching the surface of being aligned with the new Caesars Entertainment (NASDAQ:CZR), its largest tenant. It’s likely VICI will purchase at least some venues from Caesars, perhaps before the end of the year, thereby bolstering its rent revenue.
VICI has two direct competitors, and while all three are well-liked on Wall Street, VICI is the favorite in many circles, with the best medium-term upside potential.
Dow Chemical (DOW)
As a member of the materials sector, Dow Chemical is the epitome of a cyclical stock. The S&P 500 Materials Index is quietly higher by 5% over the past month and flirting with new highs, and Dow is a big reason behind that move, with a gain of almost 13% over the same period.
A point in favor of Dow Chemical is that China is one of its major end markets and that’s one of the only major global economies projected to expand this year. Dow makes specialty chemicals, polymers, adhesives and more. The product portfolio is by no means glamorous, but it’s one that’s economically sensitive, making Dow stock a legitimate near-term consideration.
Additionally, chemicals makers are seen as beneficiaries of pandemic stimulus programs:
“Today, chemical innovations already contribute to several sustainable development challenges such as energy and climate, transport, health and food, among others,” according to the World Economic Forum. “The chemicals and materials sector can leverage both direct and indirect stimulus programmes, and can strengthen their broader impact to provide shared value across business and society.”
JPMorgan Chase (JPM)
As has been the case with so many money center banks this year, JPMorgan Chase is struggling amid the confluence of low interest rates, which are suppressing net interest margins, and rising loan loss reserves. Those factors have JPM stock lower by 29.45%.
The reality facing bank stocks is that the low interest rate scenario isn’t going to change for some time; think three years. However, there is wiggle room on the loan loss reserve front. JPMorgan CEO Jamie Dimon recently noted that many customers that asked for deferrals on credit card and mortgage obligations continued making payments.
That’s undoubtedly a positive, and if the U.S. economy strengthens in the fourth quarter, it’s possible the bank releases some of those loan loss reserves, meaning that cash will be converted into earnings per share.
Over the near-term, the biggest risk facing JPM stock could be Election Day. A Democratic sweep that sees the party take the White House, Senate and expand its House majority could be a drag on financial service stocks given the party’s penchant for targeting this sector.
Penn National Gaming (PENN)
As a gambilng equity, Penn National Gaming is the epitome of a cyclical stock. Fortunately for investors, nearly all of the company’s roughly 40 land-based casinos across the U.S. have reopened following a lengthy, industry-wide shutdown due to the novel coronavirus.
Sticking with the more traditional part of the company’s business for a moment, the thesis for Penn is strong because its exposure to Las Vegas is light. Outside of the M Resort and Tropicana in Sin City, the rest of Penn’s casinos reside in regional, not destination, markets, which are recovering faster than Las Vegas because regional gaming properties are less dependent on large convention traffic and airline volumes.
But traditional casinos are only part of the reason PENN stock is higher by 29% over the past month. Since the March market bottom, Penn has been one of the best stocks, cyclical or otherwise, due to soaring expectations surrounding sports betting, particularly the online and mobile spheres.
Last week, the operator launched the highly anticipated Barstool Sportsbook in Pennsylvania, which is expected to soon expand to other states. Penn’s next earnings report should include some updates regarding initial progress on this initiative.
Additionally, more states are poised to legalize sports betting, either by legislation or via Election Day ballot propositions. Look to Louisiana and Ohio, among others, as possible near-term catalysts for PENN stock.
Believe it or not, Etsy currently meets the technical definition of being in a bear market: the stock is off 21% from its most recent highs. For those that missed the pandemic-induced run up in this name earlier this year, the present pullback is a gift.
The pandemic has made Etsy a more mainstream e-commerce option for many consumers and its earnings and free cash flow growth rationalize its lofty valuation, a combination that’s often hard to find in online shopping equities.
Consider this: Etsy accounts for just 1% of all U.S. online retail sales, but many of its top categories, such health and beauty and home goods, are among the best-performing segments of online retail. That implies Etsy has a hard-to-ignore platform for long-term growth.
American Express (AXP)
Covid-19 has weighed on American Express in a big way, prompting declines in payment volumes and revenue while credit costs increase. Those issues stem from American Express deriving significant portions of its revenue from business travel, which has ground to a halt in the wake of the pandemic. Travel and leisure accounts for 30% of Amex revenue, underscoring this name’s cyclical nature.
That levers AXP stock to economic recovery trends and developments on the Covid-19 vaccine front. Should the latter materialize in the coming months, and should holiday shopping data prove robust, there are some catalysts here for a rebound. Additionally, an increasingly diverse customer base could be a longer-term positive for American Express.
“In recent years, American Express has increasingly pursued consumers who are willing to hold a balance, atypical of traditional Amex cardholders, who usually pay off their balance each month,” according to Morningstar. “Only one fifth of Amex’s net revenue is derived from net interest income. Meanwhile, the company has increased loans at elevated rates in the low teens.”
On the date of publication, Todd Shriber held a long position in PENN.
Todd Shriber has been an InvestorPlace contributor since 2014.