Are you looking for cyclical stocks to buy after the market’s next big correction? Well, we may be in the middle of it. This September, the S&P 500 had its worst month since 2020. Where those stocks head in October is anybody’s guess.
On Sep. 22, the Federal Reserve kept benchmark interest rates near zero while announcing that it would begin tapering its monthly purchases of bonds. In addition, it warned that interest rate hikes could come sooner than expected.
As such, some experts are calling for a major correction before the end of 2021. In early September, Fundstrat Global Advisors co-founder and head of research Tom Lee told CNBC that the market could potentially correct by 10% in October.
That said, Leuthold chief investment strategist Jim Paulsen believes that cyclical stocks could benefit as Covid-19 cases slow. Normally, cyclical stocks wouldn’t be an investor’s first choice to go on the defensive. However, the pandemic has changed all of that. So, with that in mind, here are 10 cyclicals stocks to buy should a significant correction soon come to pass:
- Ralph Lauren (NYSE:RL)
- Zumiez (NASDAQ:ZUMZ)
- Abercrombie & Fitch (NYSE:ANF)
- Honda (NYSE:HMC)
- BorgWarner (NYSE:BWA)
- AutoNation (NYSE:AN)
- Foot Locker (NYSE:FL)
- Mohawk Industries (NYSE:MHK)
- Whirlpool (NYSE:WHR)
- Callaway Golf (NYSE:ELY)
Cyclical Stocks to Buy: Ralph Lauren (RL)
First up on this list of stocks to buy is Ralph Lauren. Year-to-date (YTD), Ralph Lauren’s total return is a little over 6%. However, over the past 52 weeks, it’s up some 62%, more than double the entire U.S. market.
It has been a while since I’ve written about Ralph Lauren and a lot has happened to the iconic brand since it began reshaping the business in early 2021. Back in May, the company sold Club Monaco to a private equity firm in order to focus on growing its namesake brand around the world.
Ralph Lauren reported promising first-quarter 2022 results in August. As a result, it expects 2022 sales to grow by at least 25%, with adjusted operating margins of 12.25% at the midpoint of its guidance. On the results, CEO Patrice Louvet noted the following:
“Our timeless brand is resonating strongly with consumers around the world, and the breadth of our lifestyle portfolio is enabling us to deliver products that meet evolving consumer tastes and demand as we progressively emerge from the pandemic.”
However, what is most impressive with RL stock is learning that former Best Buy (NYSE:BBY) savior Hubert Joly serves on the company’s board. Barron’s reported in early September that Joly bought stock during RL’s summer swoon. According to U.S. Securities and Exchange Commission (SEC) documents, Joly purchased 8,400 shares on Aug. 18 on the open market at $117.90 per share.
Right now, Zumiez’s total return is 9% YTD. However, over the past 52 weeks, ZUMZ stock is up 44%, a good bit higher than the entire U.S. market.
I last recommended Zumiez back in January 2019 as one of seven retail stocks to buy “for the rise of menswear.” Before that, though, I have to go back to November 2012, when the sports apparel and footwear retailer’s business and stock were stumbling.
At the time, the stock was trading around $20, so it has essentially doubled over nine years, a compound annual growth rate of around 8%. Good, but not great.
In its Q2 2021 report, this company reported that sales grew 7.3% year-over-year (YOY) and 17.6% over Q2 2019. So, its business is on solid footing.
However, Zumiez has also seen significant volatility over the years. Further, it struggles to remain above $40. Therefore, I would restrict your buying of this stock to between $20 and $30. Still, if you’re patient, you can make money here.
Cyclical Stocks to Buy: Abercrombie & Fitch (ANF)
Next up on this list of stocks to buy is Abercrombie & Fitch. Year-to-date, the specialty retailer’s total return is currently 84%, a six-fold increase compared to the return of the entire U.S. market. Over the past 52 weeks, ANF stock is also up 170%, another six-fold return compared to the entire U.S. market.
As a result of this strong performance, ANF has generated a very respectable five-year annualized total return of over 20%. Basically, Abercrombie is back.
However, if you’re worried you’ve missed the boat, consider that ANF has a free cash flow (FCF) yield of 15.8% based on trailing 12-month (TTM) FCF of $350 million. Except for in fiscal 2012, the company’s FCF has never been as high in the past decade as it is now.
Currently, a total of 11 analysts cover ANF stock on Marketwatch. They give it an Overweight rating and a median target price of $52.50. That’s upside of more than 39%.
Year-to-date, this Japanese automaker’s total return is currently 8%. However, over the past 52 weeks, HMC stock is up about 29%, slightly above the entire U.S. market.
Honda is best known for producing cars, trucks, motorcycles, portable generators and pumps. Additionally, the company recently announced that it is looking to develop an electric-hybrid air taxi as well as other innovative, futuristic products. Bloomberg reported the following on Sept. 30:
“The company plans to begin flight tests in 2023 on a hybrid design that will couple a lithium battery with a gas-turbine generator to serve as a charger and extend the aircraft’s range. If management decides to proceed with development, Honda plans to have its craft certified by 2030.”
I recently included Honda in a group of 10 value stocks to buy for less than book value. With an FCF yield in the double digits (11.5%), this pick of the stocks to buy could be a surprise winner over the next year.
Cyclical Stocks to Buy: BorgWarner (BWA)
Currently, BorgWarner’s is up 12.5% YTD, somewhat less than the return of the entire U.S. market. Moreover, for the past 52 weeks, BWA stock is up 12.5% again, considerably less than the total return of the entire U.S. market.
As far as the company goes, BorgWarner makes auto parts. More specifically, it manufactures things like turbochargers, timing systems, emissions systems, fuel injectors and many other products for both OEM (original equipment manufacturers) and aftermarket customers.
BWA’s revenues have taken off in 2021. As a result, the company expects full-year sales of $15.4 billion and FCF of $850 million at the midpoint of its guidance. If BorgWarner hits both of these estimates, it will finish 2021 with an FCF margin of 5.5%.
That might not seem like a lot, but it’s better than it has ever been. And, with an FCF yield of 8.2%, this pick of the stocks to buy looks like a bargain in a sea of expensive.
Year-to-date, the United States’ largest automotive retailer has a total return of about 70%, almost five times the return of the entire U.S. market. Over the past 52 weeks, AN stock is also up 124%, more than four times the total return of the entire U.S. market.
Back on Sept. 21, this company appointed Mike Manley as its CEO. Before, Manley was the Head of Americas for Stellantis (NYSE:STLA). Once also the CEO of Jeep (owned by Fiat Chrysler Automobiles), Manley is a quality “get,” as they say in the recruiting business.
That said, it’s going to be tough to beat the record of outgoing CEO Mike Jackson, who is retiring after 22 years at the helm. If you already own AN stock, this is an example of top-notch succession planning. If you don’t, it’s a sign that AutoNation plays for keeps.
This pick of the stocks to buy is an excellent long-term hold.
Cyclical Stocks to Buy: Foot Locker (FL)
Next up on this list of stocks to buy, Foot Locker’s total return is currently 14.5% YTD, relatively in line with the current YTD return of the entire U.S. market. Over the past 52 weeks, however, FL stock is up some 40%, a good bit higher than the total return of the entire U.S. market.
As a company, Foot Locker’s business is going gangbusters right now.
In August, FL announced Q2 2021 results that included 6.9% same-store sales growth and a 200% increase in earnings per share (EPS) to $2.21 on an adjusted basis. Foot Locker also upped its quarterly dividend by 50% and made two “strategic acquisitions.”
As a result, it expects its same-store sales growth in 2021 to be somewhere in the teens with non-GAAP EPS of at least $7.
Finally, if you happen to be an institutional investor looking for an excellent investment to park some of your savings, Foot Locker may be for you. It just announced the pricing of $400 million in 4.0% senior notes due 2029.
Mohawk Industries (MHK)
Next up is Mohawk Industries, a flooring and carpet manufacturer that has a total return of over 26% YTD, almost double the return of the entire U.S. market. Over the past 52 weeks, this pick of the stocks to buy is als0 up roughly 82% as of this writing, almost three times the total return of the entire U.S. market.
In October 2019, I suggested that owners of MHK stock consider selling to avoid a potential repeat of the December 2018 correction. Trading for around $125 at the time, it ultimately dropped below $60 in the March 2020 correction.
If you were brave enough to buy during that correction, though, you’re sitting on a gain of over 200% right now.
At the time of my article, lower gross margins were in the cards. However, in its latest Q2 results, Mohawk had a 31% gross margin, much higher than a year earlier.
Although MHK stock has done well in 2021, it still has an FCF yield above 9%. That suggests there is plenty of value still to be had here.
Cyclical Stocks to Buy: Whirlpool (WHR)
Year-to-date, Whirlpool has a total return of 12% currently. Over the past 52 weeks, however, it’s up just 10%, well below the total return of the entire U.S. market.
Back in April 2018, I warned investors that this manufacturer of home appliances could be in for a bumpy ride over the next 12 to 24 months. I thought Whirlpool was just trying to hang on. One of the reasons was its inability to convert operating profits into FCF. In 2017, it converted just 64%.
On at least two occasions between April 2018 and September 2021, WHR stock corrected to $100 or below. Of course, the stock rebounded after that, but not before stressing out long-time shareholders.
However, fast forward to today and Whirlpool’s TTM operating profit is $2.66 billion, converting $2.45 billion (or 92%) to FCF. That’s considerably stronger than in previous years. It also gives this pick of the stocks to buy an FCF yield of about 19%, well into value territory.
Callaway Golf (ELY)
Last up on this list of stocks to buy, this golf equipment company has a total return of about 17% YTD, somewhat higher than the return of the entire U.S. market. Over the past 52 weeks, ELY stock is up 47% as well, considerably higher than the total return of the entire U.S. market.
It might not sound like much, but the number of people who played golf in the U.S. in 2020 increased by 2% YOY. Additionally, according to Golf Digest, 2020 also saw “the largest percentage increase in beginning golfers and the biggest gain in youth golfers coming to the game since Tiger’s 1997 Masters win.” Callaway CEO Chip Brewer said the following on CNBC this summer:
“More people are joining golf courses, [there are] more entrants into the game, more consumers and we think the long-term trends are going to be quite attractive […] The market is going to be larger coming out the pandemic than coming in.”
While golf equipment companies like Callaway see sales slowing in 2021, they are still miles ahead of previous years. For example, in Q2 2021, the company had sales of $914 million. That was up from $297 million in Q2 2020 and $447 million in Q2 2019.
From a cash flow perspective, ELY stock hasn’t been this cheap in years.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.