Given the recent volatility in the market and significant concerns about post-election unrest, the idea of cyclical stocks to buy may not appeal to most. If anything, going the secular route seems the wisest move ahead of such uncertainty. While secular plays feature limited upside potential, they theoretically will fare much better if we succumb to a downturn or a longer-than-expected recession.
First, if we do have a recession, it will be one unlike any other. During the last major downturn, the global financial system suffered a massive shock, casting a dark cloud over everyone, irrespective of their personal employment situation. While the novel coronavirus is definitely a health crisis that has affected everyone to some extent, the economic pain has not been felt equally, if at all.
Indeed, some workers are enjoying the pandemic, if I may be blunt in my language. According to Stanford News in June of this year, 42% of the U.S. labor force was working from home full time. Think about that — these folks are enjoying the benefits of their regular salary but don’t have to deal with the stresses and costs of commuting, among other things. Therefore, buying cyclical stocks makes a little more sense when you bring in this context.
Second, if we do have a recovery, it could be a K-shaped recovery. At the peak of this year’s crisis, the gap between the national unemployment rate and joblessness for those with a bachelor’s degree or higher was 75%. Fast forward to September and this gap shrank slightly to 65%. That means those who are less educated have been feeling the brunt of the damage while those with an education are decisively heading toward a recovery, bolstering the case for cyclical stocks to buy.
Third, there is a possibility that the second wave could be more fearsome in our minds rather than in reality. Evidence of this comes in the form of Covid-19 death rates, which have significantly declined relative to the onset of the crisis. According to NPR.com, the data suggests “that physicians are getting better at helping patients survive their illness.” If so, this augurs well for the following cyclical stocks.
- Electronic Arts (NASDAQ:EA)
- Netflix (NASDAQ:NFLX)
- Upwork (NASDAQ:UPWK)
- Amazon (NASDAQ:AMZN)
- Redfin (NASDAQ:RDFN)
- Vista Outdoor (NYSE:VSTO)
- Carmax (NYSE:KMX)
- GameStop (NYSE:GME)
- AMC Entertainment (NYSE:AMC)
However compelling the idea is to adopt a contrarian route here, please note that we should expect turbulence in the weeks following the election. No matter what, the extremes from both ends of the political spectrum will not be happy with the outcome. So, play these cyclical stocks if you want but do so carefully.
Electronic Arts (EA)
What happens when cyclical stocks are so relevant that they become secular plays? For Electronic Arts, this question has been extracted from the theoretical and entered the realm of reality. According to Gamesindustry.biz, in March of this year, sales for video game consoles increased 155% worldwide. In addition, sales of physical and digital games increased 82% and 52.9%, respectively.
As we grew accustomed to the new normal, the magnitude of demand may have declined but sentiment has surely remained strong. With millions of people still working from home, video games provide a platform to break up the monotony. As well, the gaming library underlining EA stock is the envy of the industry. That’s especially the case for the EA Sports brand, which has always been popular with fans.
Further, with Europe locking down for a second time due to the novel coronavirus pandemic, the prospect for a gaming bump up increases significantly. Also, we could see the same initiative take place here, cynically boosting the profile of EA stock.
Back when Covid-19 began infecting people inside our borders, panic quickly ensued. As the film Contagion predicted many years ago, folks started to lose their minds, purchasing whatever they could get their hands on to prepare for dark days ahead. In that moment, cyclical stocks levered to online entertainment became even more relevant than they already were. Of course, one of the biggest winners in this space was Netflix.
A major reason for the streaming giant’s explosive subscriber growth was that other entertainment options were cruelly axed. According to the Wall Street Journal, when the pandemic forced restaurants and bars to close their doors (sometimes permanently, as it turned out), this sad dynamic killed demand for linear TV subscriptions. Moreover, when sports leagues suspended their seasons due to the outbreak, NFLX stock gained substantial vitality.
With the return of sports and restaurants that haven’t gone under slowly picking up the pieces, linear TV may claw back some of the losses. However, don’t dismiss NFLX stock as those who made the switch to streaming won’t want to go back so easily.
As a platform that connects skilled professionals with businesses seeking solutions for short-term projects, Upwork would have been one of the best cyclical stocks to buy even if there was no crisis. However, the pandemic fundamentally bolstered the narrative for UPWK stock. Obviously, white-collar independent contractors were already working remotely, giving them an experience advantage over everyone else who was suddenly thrust into the position.
What makes UPWK stock particularly interesting relative to other employment-related cyclical stocks is its political implications. On the California ballot this year is Proposition 16, which would effectively allow government and public institutions to include diversity as a consideration for employment. Personally, I find this offensive because it legitimizes discrimination against Asian and white Americans because they might not be diverse enough, whatever that means.
Well, a platform like Upwork can really give the middle finger to race-based policies for employment, whether for public or private institutions. Honestly, getting the job should be about demonstrating the capacity to get the job done. Anything else is just garbage ideology. With Upwork and the burgeoning gig economy, we can potentially rid ourselves of weaponized identity politics.
In some ways, Amazon goes beyond the descriptor of being one of the leading cyclical stocks. Because the underlying company dominates almost every aspect of our lives that involves technology, AMZN stock deserves its own exclusive category. As a result of its wrecking-ball style disruption and unassailable market position, you can trust Amazon no matter who’s in charge at 1600 Pennsylvania Avenue.
Where I see AMZN stock doing the most damage so to speak is in its core e-commerce business. In the first quarter of this year, e-commerce represented 11.8% of total retail sales. But in Q2, this metric skyrocketed to 16.1%. I’m curious what the figure is for Q3. However, I wouldn’t be surprised if online commerce continued to make gains.
During the old normal, many people willingly shopped at brick-and-mortar retailers because of the immediacy and cost-savings. But with a pandemic, many folks simply decided to do their shopping through the computer. Basically, Covid-19 provided a free marketing opportunity for Amazon, convincing many to go online. Likely, a majority of new converts will incorporate e-commerce moving forward, which is a net positive for Amazon.
When the coronavirus pandemic first became a reality for Americans, many would-be homebuyers felt that good fortune was about to reward their disciplined approach to money savings. With the dramatic downturn on Wall Street and with panic on the streets, it felt like 2008 all over again. Therefore, it just seemed a matter of time before home sales were slashed, turning into a buyer’s market.
However, the opposite happened. After a brief shock, home sales skyrocketed in hot housing markets. Even the median home sales price in the U.S. didn’t budge much. Honestly, you wouldn’t know that a severe pandemic hit us based off just the numbers. On that note, the case for Redfin being one of the cyclical stocks to buy seems a reasonable one. With people buying homes like crazy, RDFN stock should benefit.
Still, the reason I’m thinking about Redfin and other real estate plays is the frustration element. Before the pandemic, millennials moved to rural areas, in part because of lower costs of living. With the crisis pushing up housing to ridiculous levels in urban centers, many first-time home buyers will probably seek a new life in a quieter part of the country. If so, this migration could drive up RDFN stock.
Vista Outdoor (VSTO)
Although Vista Outdoor would technically belong in a list of cyclical stocks, it would perhaps be more accurate to classify VSTO as a politically driven investment. When the company had firearms brands in its business portfolio, it depended on the fear of Democrats imposing strict gun control to ramp up sales. Today, VSTO stock is toothless in that regard, with Vista selling its firearms units.
But that doesn’t mean it’s not relevant to the self-defense industry. Featuring one of the biggest portfolios for ammunition, business has been very good for Vista Outdoor. Due to civil unrest as well as the contentious 2020 election, ammo demand has blown through the roof. Popular calibers have seen some ridiculous premiums, yet people fearful of more violence have been opening their wallets.
Further, I believe the bullish case for VSTO stock is insulated from politics. Sure, a blue wave would be helpful for ammunition sales. However, the fear of unrest cuts across political lines. Therefore, Vista should have an upside pathway for several weeks.
With my last three ideas for cyclical stocks to buy, I’m going to dive into the realm of the speculative. First up is Carmax. Frankly, the concept of adding KMX stock to my portfolio worries me because it seems ridiculously counterintuitive. After all, we’re still in a health crisis that might worsen in the coming weeks. Also, the pandemic has absolutely gutted many small businesses.
Yet car prices continue to tick higher. According to the Wall Street Journal, part of the reason is that the affluent buyers that are still in the market are turning to more expensive models, thanks to underlying circumstances such as cheaper gasoline prices. Also, automakers have wised up, shifting production away from economy cars to more premium models and SUVs, which enjoy incredible demand.
That leaves many younger buyers being priced out of the new car market. However, that could benefit KMX stock, where the underlying company specializes in secondhand vehicle sales. Further, Carmax offers extended warranty on their cars, which adds peace of mind, especially during this traumatic time.
GameStop is one of the crazy cyclical stocks that I talked about months ago. Since then, GME stock has gone on a wild ride, at one point closing at $15 before dropping to its current level below $11. While that kind of volatility will surely scare off conservative investors, risk-tolerant speculators may want to take another look.
For one thing, GameStop caters to a young audience. True, the brick-and-mortar narrative seems under tremendous pressure due to the pandemic. However, the core consumer base for the video game retailer is at least risk of contracting Covid-19. I don’t mean to make light of the crisis, of course. But it’s important to note that we’re talking about an important social experience that many young people enjoy, irrespective of the digital options available.
Further, GME stock can potentially benefit no matter which way the economy goes. If conditions improve, GameStop could see increased console and accessories sales. But if we suffer a prolonged recession, the company will rely on its secondhand business, providing cheap entertainment for everyone.
AMC Entertainment (AMC)
I want to make something very clear from the start: AMC Entertainment is a falling knife. I don’t think that it’s any coincidence that early September was the post-pandemic peak for AMC stock. That was around the time when new daily coronavirus infections started to rise. Moreover, as cases start to worsen to astonishing levels, it’s possible that AMC could fall even lower.
I mean, why risk your health over a movie, especially one that would ordinally fill the discount bin at some big-box retailer? Besides, the option may be taken away from millions of Americans. If certain states don’t get their cases down to manageable numbers, we could see a shutdown of high-contact businesses again.
But I also can’t help noticing that the movie-going public has been denied some great summer blockbusters this year. As a purely speculative bet, AMC stock could bounce back on pent-up demand. But for right now, stay on the sidelines as the coronavirus thrashes this once mighty cineplex.
On the date of publication, Josh Enomoto held a long position in GME and AMC.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.