I like to think of cyclical stocks as boom stocks: These are shares of companies that tend to follow the ebbs and flows of the overall economy. In other words, when the economy is down, cyclical stocks decline in value. Likewise, when the economy does well, cyclical stocks generally do well also. The opposite class of stocks is non-cyclical stocks, which tend to perform steadily despite the fluctuations of the broader economy.
Another useful distinction in understanding the differences is that between necessary spending vs. discretionary spending. Cyclical stocks correlate highly with discretionary spending. These stocks represent wants like restaurant dining and luxury items. Non-cyclical stocks include the essentials: things like housing, taxes and utilities, which are needed.
An important point to remember for investors is that non-cyclical stocks tend to be defensive. That is, they protect investors against broad economic declines and maintain value steadily.
Conversely, cyclical stocks drop in weak economic environments. Generally, this class of stocks tends to rise again. Cyclical stocks are more volatile, and thus can provide greater returns.
However, there are no guarantees in the markets. A market downturn will bring cyclical stocks down in aggregate, some never to rise again.
As 2020 draws to an end, we will see the same scenario play out. Markets are set to rise, and therefore cyclical stocks are also set to rise. These laggards, however, may never rise again.
- American Airlines (NASDAQ:AAL)
- Nordstrom (NYSE:JWN)
- Weyco Group (NASDAQ:WEYS)
- Under Armour (NYSE:UAA)
- Harley Davidson (NYSE:HOG)
- Norwegian Cruise Lines (NYSE:NCLH)
- Potbelly (NASDAQ:PBPB)
Cyclical Stocks: American Airlines (AAL)
American Airlines has been one of the hardest hit major airlines in the U.S. Among the big three U.S. carriers, Delta (NYSE:DAL) has been clear and away the strongest performer through the pandemic. Year-to-date, DAL stock has dropped 26% — clearly not an insignificant amount, but better than its peers. Both United Airlines (NASDAQ:UAL) and American Airlines have fared much worse year-to-date. UAL stock has dropped by 45%, while AAL stock is down nearly 38%.
Investors might be led to believe that both United and American are similarly troubled based on the previous statistic, but American is in much more danger. While United remains in hold territory, American has been pegged as a sell by Wall Street.
American Airlines has been burning through cash at an alarming rate during the pandemic. The company’s Q3 daily cash-burn rate was $44 million, down from $58 million in Q2. By comparison, United has comparable metrics of $21 million in Q3 and $37 million in Q2.
In turn, airlines have been taking on massive debt to maintain operations while their expensive fleets lie idle by and large. The takeaway is that once operations do resume to a significant degree, these companies are going to be paying off debt incurred for a long time.
American Airlines entered the pandemic weakest, and will emerge further behind. Right now, the company maintains somewhere in the neighborhood of $14 billion to $15 billion in liquidity, so bankruptcy is unlikely. But this airline isn’t rising soon.
Nordstrom is still down about 21% year-to-date, but it has been resurgent since the beginning of November. In fact, since Nov. 2 it is up 164%. That said, I don’t see a ton of reason for it to have surged so massively. Q3 earnings weren’t exactly stellar. For example, Nordstrom reported an EBIT of $106 million in the quarter. That figure was $193 million last year.
Year-to-date sales between last year and this year are equally poor. The company made $10.694 billion in sales through Q3 of 2019, and only $6.806 billion this year. Of course, this is largely due to the pandemic, but there are headwinds for the company otherwise.
The company has experienced an increase in digital sales this year as a percentage of net sales from 34% in Q3 2019 to 54% in Q3 2020. Ultimately, consumers are leaning toward ESG-focused retailers. Luxury retailers don’t exactly align with these values in general, which means they will be at a disadvantage.
I don’t believe consumers are likely to favor luxury retailers like Nordstrom in 2021. Luxury in general is in a state of decline according to this McKinsey publication. My guess is that while consumers will certainly increase discretionary spending in 2021, luxury will be lower on the totem pole.
Weyco Group (WEYS)
Weyco Group comprises several shoe brands, including Florsheim, Stacy Adams, Nunn Bush and Bogs. This year, the company’s market capitalization has declined nearly 35%, but that’s hardly all attributable to the pandemic. The company has been in slow decline for several years.
The company managed $15.5 million in earnings on $217 million in sales through Q3 in 2019, and lost $15.5 million on $132.5 million in sales in 2020.
Retail is a competitive business, and brands come and go. There are lots of legacy brands that have struggled in recent years. Many more will find themselves in trouble in coming quarters and years. Business groups like Weyco tend to have a similar problem in that they have older respected brands that tend to fade with fashion taste.
Consumer appetite for legacy brands ebbs slowly, and these brands fade out. That is to say, Florsheim shoes may carry great nostalgia for certain readers, while others may have never heard of the brand. The story is the same though for many such brands — a slow decline.
Under Armour (UAA)
Under Armour was a great success story for the first half of the 2010s. Investors who put $10,000 into UAA stock at the beginning of 2011 would have seen their investment grow to over $70,000 by September 2015. Hindsight being 20/20, investors can see that that time period was basically an inflection point for UAA. The market sell-off that ensued for the next two years brought the stock back down to the teens.
NBA fans will recognize Under Armour for its affiliation with Steph Curry of the Golden State Warriors. The company focus on “authenticating ourselves as a premium player remains paramount to our long-term success” has relied heavily on Curry. However, Steph Curry alone cannot outsell Nike (NYSE:NKE) or Adidas (OTCMKTS:ADDYY).
The company reported nearly $3.826 billion in revenues through three quarters in 2019, resulting in $107 million in profits. This year, Under Armour has done nearly $3.071 billion in sales during the same period. However, the company recorded a loss of $733.6 million.
Clearly, the company operates at a break-even point somewhere above $3.071 billion in sales, which seems inefficient. Ultimately, a $733 million loss is bad no matter how you slice it. I don’t see UAA stock approaching 2015 levels again soon, if ever.
Harley Davidson (HOG)
Harley Davidson followed a somewhat similar trajectory to Under Armour in the past decade. HOG stock peaked in 2014 — a year earlier than UAA — and has trended down since. The decline is largely attributable to its bike’s perception and its aging customer base. Younger riders aren’t as attracted to Harley Davidsons as their fathers were.
Harley Davidson has undertaken a rebranding effort it calls “The Rewire” to combat the slide. To that end, the company posted its most profitable Q3 since 2015.
The company, however, is not providing guidance due to the pandemic, and it should also be noted that although profitability increased, sales did not.
Harley Davidson realizes over half of its sales from the U.S. market. In my mind, this is a brand that represents an iconic era of American culture. But based on its demographics, this is a product that can’t be easily rebranded. Harley is Harley, after all. I think it has to figure out how to sell its bikes as they are, and not move toward e-bikes as they tried to. And that’s a very difficult sell.
Norwegian Cruise Line (NCLH)
The cruise industry is highly consolidated and highly concentrated. The three main competitors, Carnival (NYSE:CCL), Royal Caribbean (NYSE:RCL) and Norwegian Cruise Line, account for roughly three-quarters of industry revenues. Each company has multiple sub-brands under it as well. Failures and consolidations in the 1990s have resulted in the current industry landscape.
Norwegian Cruise Line is the smallest of the three industry leaders. This is why I believe that it is going to have the hardest time rising. It’s clear that size and resources are vitally important in this industry and that power wins.
None of the three companies is in a good place currently. In fact, each company has poor financial strength due to debt issuance over the past several years. My hypothesis is simple: Norwegian is going to have the most trouble simply because it is the smallest. Because if one thing’s clear about the cruise line industry, it’s that it is dominated by a few big fish.
Restaurant spending is hig
hly cyclical, which has been well-demonstrated this year as stocks for basic consumer goods have gotten a bump. Consumers cook more at home when the economy weakens and money becomes tighter.
One such stock affected by this trend is Potbelly. PBPB stock traded at $30 back in 2013, but now it trades at about $5.29. So, although the pandemic didn’t necessarily cause the company’s troubles, it didn’t help either. Fast-casual dining is a competitive industry without very high barriers to entry. It doesn’t cost a lot of make sandwiches and open retail shops. So, while I personally like their sandwiches, I wouldn’t touch their stock.
Sales are down roughly 30% through Q3 this year compared to last year. However, the company may be in trouble even if it can regain sales levels of the previous year. Stock prices were at the same level as they are now even with those higher sales of last year.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.”