Valuations matter. That much is becoming apparent to investors focused on cyclical stocks today.
Indeed, the hyper-growth segment of the market is selling off to a degree that is making investors nervous today. Stocks that do very well in positive cyclical growth environments aren’t doing as well as they previously had in late 2020 and early 2021.
There are a few reasons for this. Rising bond yields have reduced the inherent value of most growth stocks. This is counter-intuitive on its face. Higher inflation driving bond yields higher should be good for cyclical stocks, right?
Well, sort of.
Demand-driven spending is likely to rise. However, costs are also expected to rise, in many cases faster than revenues can grow. Additionally, the relative value that growth stocks have compared to fixed-income options like bonds is reduced in such an environment.
Thus, investors are left in a tricky place. Finding great growth stocks at reasonable valuations is a difficult task today. Therefore, more investors are in search of more defensive cyclical plays that haven’t seen as pronounced stock price appreciation of late.
Here are seven stocks I think fit this profile nicely for such investors:
- Alibaba (NYSE:BABA)
- Apple (NASDAQ:AAPL)
- Disney (NYSE:DIS)
- Restaurant Brands International (NYSE:QSR)
- Stag Industrial REIT (NYSE:STAG)
- Boeing (NYSE:BA)
- Enbridge (NYSE:ENB)
Defensive Cyclical Stocks: Alibaba (BABA)
For investors looking for beaten-up cyclical plays, Alibaba is about as good as it gets in this market.
Often touted as the “Amazon (NASDAQ:AMZN) of China,” Alibaba’s e-commerce platform provides about as much cyclical exposure investors could ever want. It’s a company with its tentacles in so many different businesses, it’s actually hard to keep track of. Looking at the company’s investor presentation, it’s clear this stock is one of the best cyclical plays in the world. For those focusing on the hyper-growth Chinese market, this is the go-to stock right now.
China’s burgeoning middle class and consumer base, which is about as e-commerce savvy as any nation in the world, is notable. Indeed, Alibaba’s appeal grows when one considers its valuation multiple relative to its growth rate. The company recently grew earnings by 64% (including a recent acquisition), yet is only priced at 16-times forward cash flow. That’s cheap.
That said, Alibaba isn’t without risks. Recent delisting threats have poured cold water on all Chinese stocks. Investors are now having to decide whether such stocks are worth the risk today.
In my view, Alibaba is one of the best cyclical plays in the world to consider today. It’s attractively priced and has a growth trajectory superior to most U.S. stocks. Indeed, this stock is a long-term investor’s friend.
Indeed, it’s safe to say Apple is about as high-quality of a cyclical play in the U.S. as any company right now.
In terms of long-term holdings, Apple remains one of my top picks. I mean, any stock that accounts for roughly 40% of Warren Buffett’s liquid portfolio is worth considering.
One must consider why the Oracle of Omaha would step into a company like Apple. After all, Mr. Buffett is notoriously careful around technology stocks in general.
Perhaps there are two reasons for this. The first is that Apple’s business model really isn’t that difficult to understand. It’s more of a consumer discretionary play than a tech play at this point. Secondly, the company’s got an absolutely massive moat. It’s as defensive as tech companies get.
Apple’s incredible brand and integrated ecosystem of consumer-friendly products provide investors with an unflappable in the consumer discretionary space. Apple has shifted the paradigm among what investors though was previously possible in this sector.
From computers to tablets, smartphones, and (maybe) an Apple car, this company has disrupted nearly every business it’s gone into. Indeed, investors banking on Apple are banking on their next foray. Right now, all eyes are on the aforementioned eventual Apple car announcement.
Right now, I think Apple’s defensive attributes and its pro-cyclical alignment make this company the perfect pick for every long-term investor.
Defensive Cyclical Stocks: Disney (DIS)
Another American company with an incredible moat, Disney ought to be on the watch list of most investors right now.
The stock has recently corrected from its all-time highs, and remains 15% below its peak, as of May 27. While many investors have noted that Disney’s forward-looking prospects may be fully priced in at these levels, I disagree.
Indeed, Disney’s streaming segment is skyrocketing right now. Subscriber growth for the company’s Disney+ platform is astronomical. In fact, Disney reached 100 million subscribers in 16 months after its launch. It took Netflix (NASDAQ:NFLX) approximately 10 years to accomplish the same feat.
Now, Disney is pumping a lot of its excess cash into its streaming division. And it’s not yet profitable. However, Disney’s valuation reflects the growth potential its peers have shown in this burgeoning sector.
With the pandemic (hopefully) coming to a close, investors are also pricing in a resurgence in parks and hospitality-related revenues. These sectors have been absolutely decimated, and are the primary drivers of otherwise dismal performance for Disney in recent quarters.
That said, I expect long-term investors will continue to flock to this name. Disney’s portfolio of brands and IP is among the most rich in the world. And similar to Apple, Disney’s moat tied to customer loyalty and brand quality can’t be disputed.
Restaurant Brands International (QSR)
Investors seeking a high-growth option with an extremely defensive footing can’t go wrong with Restaurant Brands. For those who aren’t aware, Restaurant Brands is the parent company of Burger King, Popeyes, and Tim Hortons.
This stock may be one that flies under the radar for most investors. Indeed, that makes sense. The company’s portfolio of fast food banners doesn’t really incite much enthusiasm from investors. It’s a stock that many view as a slow-growth income play for long-term investors seeking reasonable returns.
However, there’s a lot to like about Restaurant Brands right now.
For starters, the company’s core banners provide a level of defensiveness that’s hard to get in today’s market. The quick service restaurant industry tends to be a much safer place to be invested in times of economic weakness.
However, as we’ve seen with the pandemic, Restaurant Brands’ recent numbers haven’t looked that great.
I think there’s an intriguing cyclical thesis for owning this otherwise counter-cyclical play. As the economy continues to reopen rapidly, in-restaurant dining and same-store-sales will continue to take off once again. Additionally, growth markets, particularly in Asia, continue to provide investors with ample room for growth over the long-term.
This is a stock I think long-term investors shouldn’t sleep on at these levels.
Defensive Cyclical Stocks: Stag Industrial REIT (STAG)
For pro-cyclical investors, real estate has turned out to be a great place to invest in recent months.
Historically low interest rates have propelled real estate valuations to record levels. Accordingly, investors who have added diversification in the real estate sector have done quite well of late.
That said, concerns around these soaring valuations has put some investors on edge. Rising inflation concerns have stoked higher bond yields. Accordingly, mortgage rates have deviated from their post-pandemic lows of late.
That said, not all real estate sectors are created equal. In the case of Stag REIT (real estate investment trust), investors get access to a high-quality portfolio of industrial real estate assets. This asset class happens to be much more defensive, given its ties to growth sectors of the economy. The warehouses and distribution centers Stag owns power the e-commerce world. Accordingly, investors bullish on cyclical growth in this sector of the economy may want to look at REITs such as Stag today.
Indeed, Stag represents a unique “picks and shovels” defensive play on cyclical growth. For long-term investors seeking diversification, this is a great option. For those seeking income, Stag’s 4.1% yield.
This REIT is the perfect complement to a growth-heavy portfolio. Stag won’t provide the kind of capital appreciation investors seem to be after today. However, from a total return perspective, this stock is a great long-term holding.
The cyclical nature of air travel has come into focus in a big way as a result of the pandemic.
Indeed, as vacationers jump aboard airplanes at levels we haven’t seen since the pandemic started, companies like Boeing appear well-positioned to take advantage of this catalyst. Recent reports suggest air travel has reached a new pandemic high this past weekend. Accordingly, it’s no surprise to see how BA stock has performed of late.
Since peaking in mid-March at nearly $280 per share, shares of BA stock have corrected to intriguing levels for those seeking defensive cyclical plays. Boeing’s large moat in the aerospace and defense manufacturing sectors is formidable. And with both sectors being supported by various catalysts of late, Boeing appears to have some serious tailwinds right now.
It’s important to note that Boeing is still trading well below its pre-pandemic highs. This is a stock that’s experienced a tremendous amount of turbulence of late, and there will be obstacles to overcome. Whether airlines proceed with new airplane purchases or go the leasing route is one headwind investors are considering right now. However, government bailouts of Boeing’s largest customers appear to have assuaged these concerns for now.
Boeing represents perhaps the most risky play on this list, in the sense that the rebound that’s being priced in right now isn’t guaranteed. New waves of the coronavirus are ravaging various regions of the world as we speak.
However, those bullish on a return to normal have a great long-term holding in Boeing at these levels. It’s still reasonably priced compared to historical levels. And investors have taken notice.
Defensive Cyclical Stocks: Enbridge (ENB)
Given the recent turmoil caused by the high-profile Colonial pipeline hack in recent weeks, pipelines have come into focus of late. They’re essential to the functioning of the economy, whether environmentalists like it or not.
Enbridge is a unique Canadian pipeline player, delivering heavy crude to refineries in the U.S. The company’s cash flows have proven to be extremely stable over the years. This can be attributable to Enbridge’s favorable contracts with its oil-producing counterparts. This high level of cash flow stability and predictability is what drives the stock’s defensive posture.
However, given the cyclical post-pandemic surge that’s expected in demand for oil and oil-based by-products, Enbridge stands to benefit from cyclical growth catalysts as well. This play on the broader energy and commodities sector is one that provides a unique mix of defensiveness and cyclical growth-based upside few stocks provide today.
Enbridge’s sky-high yield of more than 7% is certainly enticing to investors with income needs. While the company’s payout ratio and balance sheet have become a focal point for those wary of taking on the risk of a dividend cut with Enbridge, it does appear in this climate the company will be able to sustain its high payout.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.