As a whole, cyclical stocks are typically economically sensitive stocks. And as markets get ready to wrap up 2020, there is still uncertainty about the economy. Many analysts, as well as Federal Reserve Chair Jerome Powell, would like to see Congress put more money into the recovery and issue a second round of stimulus checks to the American public.
Therefore, I will introduce seven cyclical stocks that are likely to benefit in the case of further direct payments to most U.S. households.
When economic conditions worsen, a great number of consumers re-adjust their spending levels. For example, they may cut back on purchases of non-essential and discretionary items. When households evaluate the economy more negatively, a number of cyclical industries get adversely affected. In turn, share prices of cyclical businesses tend to suffer during economic fluctuations and downturns. And in times of economic decline or recessions, earnings decrease or even crater.
Examples of such cyclical firms come from several industries, including travel (such as airlines, hotels), leisure and recreation (restaurants or movie theaters), high-end and luxury retailers, car manufacturers, construction (such as homebuilders) and industrial metals and minerals, which are at the center of construction and manufacturing. Technology stocks can also be affected, especially those that manufacture or market consumer items. On the other hand, earnings of cyclical companies typically do extremely well when times are good.
Federal Reserve Wants More Stimulus for Consumers
Economic downturns do not last forever. After several months or quarters, the economy first stabilizes and then begins to turn up. That said, policies followed by the Fed — as well as federal stimulus measures — can help in the recovery process.
Moreover, Mr. Powell recently said, “Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses. Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy, and holding back wage growth.”
So, with that information, here are seven cyclical stocks that would likely benefit from another round of stimulus checks:
- Brunswick (NYSE:BC)
- D.R. Horton (NYSE:DHI)
- Expedia Group (NASDAQ:EXPE)
- Group 1 Automotive (NYSE:GPI)
- Invesco S&P SmallCap Consumer Discretionary ETF (NASDAQ:PSCD)
- Whirlpool (NYSE:WHR)
- Zumiez (NASDAQ:ZUMZ)
They are well-positioned to reap the growth from the recovering consumer demand in the coming quarters. Now, let’s dive in and take a closer look at each one.
Cyclical Stocks to Buy: Brunswick (BC)
52-Week Range: $25.22 – $73.99
Year-to-Date (YTD) Price Change: Up 19%
Dividend Yield: 1.5%
Mettawa, Illinois-based producer of marine engines and boats Brunswick is our first of our cyclical stocks. The company, which is highly regarded as one of the global leaders in the recreational marine market, started trading on the NYSE in 1925.
In late October, Brunswick released third-quarter results. Net sales came at $1.23 billion, an increase of 26.3% year-over-year. Also, adjusted diluted earnings per share (EPS) were $1.80 and free cash flow was $396 million.
The company reports earnings in three segments, i.e., Propulsion, Parts and Accessories and Boats. That said, all three areas saw revenue increase during the quarter.
Additionally, CEO David Foulkes said, “Each of our businesses delivered outstanding operating results in the third quarter. …Our extraordinarily strong free cash flow generation provides us with the flexibility to execute our capital strategy which, amongst other things, encompasses our planned investments in growth initiatives….”
Overall, BC stock boasts a forward price-earnings (P/E) and price-sales (P/S) ratios stand at 12.99 and 1.38, respectively. So, with all of that in mind, long-term investors may consider buying the dips in the shares.
D.R. Horton (DHI)
52-Week Range: $25.51 – $81.21
YTD Price Change: Up 42%
Dividend Yield: 1.1%
Arlington, Texas-based homebuilder D.R. Horton would be quite well-known by many InvestorPlace.com readers. Despite the unknowns in the economy, housing has remained a resilient or even bright spot.
The company, which was set up in 1978, has operations in 29 states. Over the past two decades, the group has become the largest homebuilder by volume.
On Nov. 10. it released Q3 results. Revenues came at $6.4 billion, up 27% YOY. Net income of $829 million (64% increase YOY) translated into earnings of $2.24 per diluted share. A year ago, the number had been $1.35 per diluted share. Also, D.R. Horton closed 65,388 homes in the 12-month period ended Sept. 30, 2020.
On that note, Donald R. Horton — chairman of D.R. Horton — had this to say:
“The D.R. Horton team finished the year strong, highlighted by an 81% increase in net sales orders in the fourth quarter to 23,726 homes, a 60% increase in consolidated pre-tax income to $1.1 billion and a 27% increase in revenues to $6.4 billion. With a record 65,388 homes closed in fiscal 2020, D.R. Horton completed its 19th consecutive year as the largest homebuilder in the United States.”
Moreover, DHI stock’s forward P/E, and P/S ratios stand at 9.38 and 1.34, respectively. Thus, any decline toward $70 level or below would make the shares even more attractive for long-term investors.
Cyclical Stocks to Buy: Expedia Group (EXPE)
52-Week Range: $40.76 – $130.57
YTD Price Change: Up 12%
Seattle, Washington-based online travel platform Expedia has been one of the companies that suffered under the health and economic effects of the pandemic. Over the past decade, global tourism has been one of the most important industries worldwide — contributing more than 10% to global GDP levels in 2019. However, final numbers for 2020 are likely to be much lower.
The group has an extensive portfolio of businesses and brands that cater to travelers both in the U.S. and worldwide. In addition to Expedia, other brands include Hotels.com, Orbitz, Cheap Tickets, Vrbo, Expedia Cruises, Trivago and others. Expedia was founded in 1996, as a division of Microsoft (NASDAQ:MSFT), and was later spun off as a public company in 1999.
In early November, it released Q3 metrics. Revenue came at $1.5 billion, a decline of 58% YOY. A year ago, it had been $3.55 billion. Also, net loss of $221 million translated into a loss of $1.56 per share. During the same quarter last year, it had been net income of $409 million and EPS of $2.71.
Peter Kern, vice chairman and CEO of Expedia group, had this to say about the Q3 earnings:
“Travel demand continued to be significantly impacted by the virus in the third quarter, but the increased travel in the quarter, along with continued progress on our cost initiatives, led to improved financial results. As the last several weeks have demonstrated, the travel industry and the world still face a prolonged and bumpy path to recovery, with increasing COVID-19 cases and uncertainty around vaccine and therapeutic timelines.”
Moreover, EXPE stock’s forward P/E, and P/S ratios stand at 102.04 and 2.50, respectively. Put another way, compared to our two other companies earlier, Expedia remains considerably more expensive from a valuation standpoint. Yet, if you believe there could be pent-up demand for travel in the coming quarters — especially if there is a vaccine — then Expedia stock should be on your radar.
Group 1 Automotive (GPI)
52-Week Range: $26.26 – $136.35
YTD Price Change: Up 20%
Houston, Texas-based Group 1 Automotive is our next stock. Since 1997, it has become one of the largest vehicle dealership businesses domestically and has also expanded into the U.K. and Brazil. Through its dealerships it sells new and used cars and light trucks, and offers repair and vehicle financing services.
Additionally, Group 1 recently released its Q3 results. Total revenue was $3 billion, a decline of 2.5% YOY. That said, four segments contribute to revenues, i.e., New Vehicles, Used Vehicles, Parts & Service, and Finance & Insurance (F&I).
Moreover, adjusted net income of $129 million meant adjusted diluted EPS of $6.97. A year ago, EPS had been $3.02 in 2019. Management highlighted that the quarterly EPS hit an all-time record. Investors were pleased to hear that in October, Group 1 Automotive “announced a new $200 million share repurchase program.”
President and CEO Earl J. Hesterberg said this regarding the earnings:
“As we rebuilt our U.S. and U.K. businesses from the extreme furlough levels in April, we targeted a 20% efficiency improvement in our sales and service processes, which drove our key cost metric, [Selling, General and Administrative] SG&A as a percent of gross profit, below 60% for the first time in our history. Lower U.S. vehicle sales were offset by improved F&I performance and higher margins supported by lower inventory levels. Additionally, our U.K. business turned in a record performance with year-over-year growth in service and vehicle sales.”
GPI stock’s forward P/E, and P/S ratios stand at 6.43 and 0.19, respectively. Long-term investors who see potentially increased consumer spending, especially in the auto sector, in 2021 should consider buying GPI stock shares.
Cyclical Stocks to Buy: Invesco S&P SmallCap Consumer Discretionary ETF (PSCD)
52-Week Range: $29.16 – $76.46
YTD Price Change: Up 17%
Dividend Yield: 0.9%
Expense Ratio: 0.29%
Our next discussion centers around an exchange-traded fund (ETF): the Invesco S&P SmallCap Consumer Discretionary ETF. The fund provides exposure to a range of U.S.-based consumer discretionary companies. It started trading in 2010.
PSCD, which has 92 holdings, tracks the S&P SmallCap 600 Capped Consumer Discretionary Index. These cyclical businesses come from retail, automotive, leisure and recreation, media and real estate. And the top ten businesses comprise close to 30% of net assets. Put another way, no stock’s weighting is large enough to affect the the fund by itself.
Capri (NYSE:CPRI), Yeti (NYSE:YETI), Crocs (NASDAQ:CROX), Meritage Homes (NYSE:MTH) and Stamps.com (NASDAQ:STMP) are the leading names in the ETF. The fund’s forward P/E 18.87 and P/B ratios are 2.29, respectively. In the coming weeks, a potential short-term profit-taking could push PSCD stock toward $67.5, which would offer a better risk/return profile.
52-Week Range: $64.00 – $207.30
YTD Price Change: Up 29%
Dividend Yield: 2.6%
Benton Harbor, Michigan-based leading appliance manufacturer Whirlpool is well-know both stateside and globally. The company was founded in 1911 and operates within the consumer durables industry, which is “three times more cyclical than nondurable-goods industries.”
In addition to Whirlpool, its brands include Maytag, KitchenAid, JennAir, Bauknecht and Indesit, among others. On Oct. 21, the group released Q3 results. Net sales came at $5.29 billion, an increase of 3.9% YOY. Also, diluted EPS hit $6.91, an increase of 74.1%. And free cash flow was $170 million.
Chief Financial Officer Jim Peters said, “Our liquidity position remains exceptionally strong, and we expect to continue to strengthen our balance sheet by paying down the short term debt we took on at the outset of the pandemic by the end of the year. Finally, we are happy to have announced a dividend increase for the eighth consecutive year, reflecting the confidence we have in our business now and in the future”
Additionally, WHR stock’s forward P/E, and P/S ratios stand at 11.15 and 0.63, respectively. And short-term decline toward $180 would make the shares a solid long-term buy.
Cyclical Stocks to Buy: Zumiez (ZUMZ)
52-Week Range: $13.13 – $35.68
YTD Price Change: Down 3%
Lynnwood, Washington-based lifestyle retailer Zumiez is our final company. The group’s main customers are “young men and women who want to express their individuality through the fashion, music, art and culture of action sports, streetwear, and other unique lifestyles.”
Its brands include Zumiez, Blue Tomato and Fast Times. In addition to retail stores, it has recently increased online presence to offer an omni-channel retail experience. And in early September, Zumiez announced fiscal 2020 second-quarter results. Net sales came at $250.4 million, an increase of 9.6% YOY. However, management noted, due to store closures, stores were open for 73.4% of the quarter. Nonetheless, comparable sales for the period increased 37.3% over the same time last year.
Also, net income was $25.4 million, or $1.01 per diluted share. A year ago, the comparable metrics had been $9 million, or 36 cents per diluted share.
Overall, Rick Brooks — CEO of Zumiez — was pleased with the results and said this:
“With close to $300 million in cash and no debt on our balance sheet, we are set up well to navigate whatever headwinds arise over the coming quarters and emerge from this crisis positioned to accelerate market share in each of our geographies.”
ZUMZ stock’s forward P/E, and P/S ratios stand at 11.09 and 0.78, respectively. So, in the case of another stimulus check for the consumer, Zumiez’s sales revival could easily continue — making it one of the best cyclical stocks out there.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for more than two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination.