Cyclical stocks have a lot of tailwinds behind them right now. Cyclical stocks are those which correlate strongly to the cycles that dictate the economy. Thus, in economic downturns, these equities are pulled downward and experience price depreciation. Conversely, in boom times, they typically rise.
Cyclical stocks also have higher volatility and are seen as producing higher returns during periods — that is, cycles — of economic strength.
There is a palpable feeling that the country is on the cusp of reopening. Headlines are focused on the idea that as soon as that occurs, the economy will get a massive shot in the arm. The reopening will undoubtedly be a boon to markets.
As consumers, investors and everyone else eagerly awaits a reopened country and economy, cyclical stocks are raring to run. In fact, some already have. Investors who establish a position in cyclicals are in prime position to benefit. Unfortunately, the recent run up has made finding targets slightly more difficult.
- Delta Airlines (NYSE:DAL)
- Airbnb (NASDAQ:ABNB)
- Costco (NASDAQ:COST)
- Boeing (NYSE:BA)
- CarMax (NYSE:KMX)
- TPI Composites (NASDAQ:TPIC)
- Armstrong World Industries (NYSE:AWI)
Cyclical Stocks To Buy: Delta Airlines (DAL)
Consumers, investors and market pundits likely think of the airline industry when the topic of cyclical industries arise. That’s for good reason. People travel less in leaner economic times. The black swan event pandemic dealt carriers like Delta Airlines, a massive blow. Early in the pandemic the narrative was all of the deals in airline stocks as their values were halved nearly overnight. The idea was to buy in cheap, ride out the pandemic, and reap the imminent returns.
Soon, the sustained massive losses of grounded fleets changed the narrative. Daily cash burn rates were vital to the narrative of every operator. Suddenly worries of impending bankruptcies were all the talk.
But there is hope again. Most operators have focused their efforts on high liquidity levels and bankruptcy worries have subsided. Investors have already begun to run up the strongest operators on rumors of the cyclical rebound.
This has put Delta next up in line. I’m an advocate of investing in Southwest (NYSE:LUV) as a first choice among airline stocks. But investors have already run it up in the last two months. Right now LUV shares cost $62. They were $57 when the pandemic began. There is no logical growth left there.
Delta is the next best option among the major carriers that dominate the industry. DAL stock cost $58 prior to the pandemic, but now sits at $49. Some would argue that United Airlines (NASDAQ:UAL) is equally attractive. However, Delta’s trailing 12-month earnings per share loss of $19.50 is better than United’s $25.37 loss, suggesting its strength.
Hotels are another cyclical sector within the stock market. It’s the same narrative as above: People don’t travel as much in weaker economies. That’s the rub with Airbnb.
Investors have already run up several strong operators within the hotel sector on the perceived impending growth in cyclicals. Wyndham Hotels (NYSE:WH) would be a logical choice if it weren’t already $10 above its pre-pandemic prices.
ABNB stock, on the other hand, only started trading in December. It doesn’t have a pre-pandemic price by which to judge its merits. In any case, ABNB stock hasn’t been run up on positive sentiment for cyclical stocks.
But the notion for buying in now is simple: People are going to be booking Airbnb properties much more in 2021 than they did in 2020.
When Airbnb last released earnings, investors drove up the stock price. Shares are lower now, and ABNB stock has room to run. The properties platform recorded a 30% decrease in revenue from 2019 to 2020, which is attributable to the pandemic.
The company is a force in travel, has barely been around as a publicly traded stock for a few months, and travel is likely to open relatively soon. It could really run from here.
Costco is another retailer with room to run. COST stock has already risen in the past three weeks but there is room for it to retest recent highs. Shares are now near $350 each after rising from a recent low of $311 on March 8. In light of the fact that Costco shares eclipsed $390 in December, it looks like there is room for share prices to appreciate.
Net sales for the first 24 weeks of fiscal 2021 increased 15.8%, to $86.23 billion. In the same period of 2020, net sales were $74.49 billion. Fourth quarter sales increased 14.7% to $43.89 billion, from $38.26 billion last year. The 26-week period that ended on Feb. 28, 2021 was also strong compared to the same period last year. The company recorded $93.16 billion in sales, a 15.4% increase over the $80.76 billion a year earlier.
Costco is a retailer with a lot of positives underpinning its business and its investment thesis. Some investors may worry that Costco is artificially inflated due to the pandemic. But the company had a great 2019, and share prices aren’t much higher than they were prior to the start of the pandemic.
Boeing is an industrial manufacturing stock. Manufacturing tends to be very cyclical as durable goods, raw materials and heavy equipment correlate highly with the economic tides. Most headlines including Boeing tend to relate to the company’s problems with its 737 Max.
An equally important story is just how much BA stock has moved during the pandemic. Shares dropped below $100 during the depths of the pandemic’s market effects. When Donald Trump supported a bailout of Boeing, that was a safe indication that it would run upward. Indeed, BA stock rose to $160 in a week’s time following that announcement.
Yet, BA stock remains far away from its pre-pandemic prices. It currently trades at $230 per share, but was roughly $100 higher just before the pandemic started.
It is a safe bet that Boeing will work out its problems with the 737 Max and that better days are ahead. The shares are overweight, the company has only one main rival in Airbus, and industrial/manufacturing stocks are going to heat up in lock step with the reopening of the economy.
At the micro level there’s plenty to dislike about Boeing, but the larger trends look likely to drive prices upward meaning there is plenty of room for BA shares to rise.
Automaker stocks are themselves cyclical. Consumers simply buy fewer cars when the economy turns south. But consumer spending on automobiles rises coming out of a downturn. So it makes sense to invest in automobile stocks coming out of an economic slump as the momentum turns in the opposite direction.
Covid-19 led to a boom in the used car market. That’s partly because it is now much easier to shop online and find a great deal on a used vehicle. Consumers are realizing the benefits of buying used, and purchases should boom in the coming months. That’s why it makes sense to invest in Carmax as a retailer of used and auctioned vehicles.
The company last released earnings in December. Results were encouraging. Revenues increased 35.9% while total units sold increased 1%. The company recorded a gross profit per vehicle sold of $2,151, similar to the prior year’s period. And wholesale units sold increased by 10.8% but have a lower profit of $906 per unit.
In any case, KMX stock should run up as consumers rush out to buy vehicles on positive economic news.
TPI Composites (TPIC)
TPI Composites manufactures fan blades for the wind turbines that generate wind power. In terms of cyclical names, TPIC stock is interesting because it is part of the industrial sector. The company has further tailwinds in that the U.S. is increasingly investing in alternative energy.
But even in a down economy, where industrial firms often struggle, TPI Composites managed to do well. That means the company can really soar once the economy reopens and capital flows into industrial manufacturers again.
TPI Composites sold 953 sets of wind blades in Q4 2019. That number increased to 988 in Q4 of 2020. The company sold 3,544 sets of blades in 2020, up from 3,189 in 2019. A recent Forbes article predicted a return to renewable growth, which should provide further tailwinds for TPI. Eight out of ten of the world’s major economies have committed to net zero emissions by 2050 and the U.S. could join. Sales should rise.
Investors are already putting capital into cyclical stocks. Sectors like casual dining have already been run up. There isn’t much room for investing logically into shares there. Industrial stocks are also cyclical but have yet to be run up. There’s room left for TPIC stock to do so.
Armstrong World Industries (AWI)
Armstrong World Industries is another play on cyclical stocks in the industrial sector. The company produces ceiling, wall, and installation systems.
AWI stock looks like it has room to run up. It still has not retraced its pre-pandemic prices like many cyclical stocks have. Prior to the pandemic hitting, AWI stock traded above $100, but currently trades around $91.
Sales were only down 3% in Q4 of 2020 compared to 2019. That means the company is close to having regained its former strength. If investors push capital into industrials as the next cyclical sector Armstrong will run up.
The company’s 2021 guidance indicates that there is a reasonable bull thesis. Management anticipates that net sales should increase between 10%-13% in the year, with EBITDA between 9%-13%.
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.