Consumer cyclical stocks follow the economic cycle of expansion and recession. These firms typically operate in recreation and leisure (such as hotels, restaurants, travels) as well as retail (including luxury), household durables, automotive and media.
InvestorPlace.com readers may know that these companies offer consumer discretionary goods and services that aren’t essential purchases like consumer staples. Therefore, they are exposed to fluctuations in consumer spending.
As a result, consumer cyclical shares typically perform well during economic growth but tumble when our economy is not performing at its best level.
Consumer confidence is a critical measure of the public’s attitude toward spending. A recent report by McKinsey suggests overall optimism remains strong.
While high-income consumers are the most optimistic, almost all income groups contribute to the growth in spending levels. Similarly, all generations are opening up their wallets, even though millennials are currently spending the most.
Thus, consumer cyclical stocks are forecast to generate solid returns in this stage of the business cycle. With that information, here is a list of the ten best consumer cyclical stocks to position for significant upside in 2022:
- Chewy (NYSE:CHWY)
- Coca-Cola (NYSE:KO)
- Costco Wholesale (NASDAQ:COST)
- Ford Motor (NYSE:F)
- Home Depot (NYSE:HD)
- Invesco S&P SmallCap Consumer Discretionary ETF (NASDAQ:PSCD)
- Nike (NYSE:NKE)
- Royal Caribbean Cruises (NYSE:RCL)
- TJX Companies (NYSE:TJX)
- Vanguard Consumer Discretionary Index Fund ETF Shares (NYSEARCA:VCR)
Consumer Cyclical Stocks: Chewy (CHWY)
52-week range: $40.62 – $120.00
If you are a pet parent, then you are likely to know of Chewy, a pure-play on our love of animals.
The e-commerce group sells a wide range of products for dogs, cats, birds, fish, horses, and reptiles as well as pet insurance. Chewy has grown almost 15% YOY to 20.4 million active customers.
Management put out Q3 2021 results on Dec. 9. Revenue grew 24% year-over-year (YOY) to $2.21 billion. Net loss of $32.2 million translated into 8 cents per diluted share. Cash and equivalents ended the quarter at $727 million.
CHWY stock hovers around $40, down 61% over the past 12 months. It has declined 29% year-to-date (YTD). However, Chewy’s downside appears limited at the current price level.
Shares are trading at 2.7 times trailing sales. The 12-month median price forecast for Chewy stock is $70. If you believe the e-tailer can increase revenue with its sticky ecosystem centered around pets, then the stock deserves your attention.
Consumer Cyclical Stocks: Coca-Cola (KO)
52-week range: $48.11 – $61.45
Dividend Yield: 2.76%
Coca-Cola, the largest nonalcoholic beverage company globally, has a portfolio of about 200 beverage brands. Such global market dominance over decades has meant strong long-term returns with robust profitability and soaring cash flow.
The iconic brand reported Q3 results in late October. Net revenue increased 16% YOY to $10 billion. The company generated a net income of $2.47 billion, or 57 cents per diluted share, compared to $1.74 billion in the prior-year quarter.
KO stock has recently surpassed its pre-pandemic high as investors have rotated out of growth stocks toward defensive ones. It hovers slightly above $60, up 25% in the past 12 months. Shares are trading at 22.9 times forward earnings and 6.5 times trailing sales.
The 12-month median price forecast for Coca-Cola stock stands at $64. Therefore, interested readers could consider investing at the next pullback. Finally, KO stock is a Dividend King that generates a 2.8% dividend yield.
Consumer Cyclical Stocks: Costco Wholesale (COST)
52-week range: $307.00 – $571.49
Dividend Yield: 0.65%
Costco Wholesale operates well over 800 membership retail warehouses worldwide, and has a loyal customer base. Its membership business model means an attractive pricing model for customers.
Moreover, its annual membership fees generate reliable, recurring profits. Thus, despite slim profit margins on products, Costco enjoys robust revenues.
The group announced Q1 FY22 results on Dec. 9. Revenue increased 16% YOY to $50.36 billion. Investors were pleased that its e-commerce segment grew 37%. Net income also soared 13% YOY to $1.32 billion, or $2.98 per diluted share. Cash and equivalents ended the period at $12.75 billion.
COST stock gained 50% in 2021. It currently hovers at $490 territory, up 35% over the past year. Shares are trading at all-time high multiples of 46.1 times forward earnings and 1.3 times trailing sales. The 12-month median price forecast for Costco stock is at $570.
Consumer Cyclical Stocks: Ford Motor (F)
52-week range: $9.97 – $25.87
Dividend Yield: 1.77%
Legacy auto group Ford is known for its trucks, utility vehicles, cars, as well as Lincoln luxury vehicles.
In the past several quarters, it has also gained a solid foothold in the electric vehicle (EV) market with its F-150 pickup truck and the Mustang Mach-E.
Ford released Q3 results in late October. Revenue declined 5% YOY to $35.7 billion. Net income of $1.8 billion translated into earnings per share (EPS) of 45 cents per diluted share. Cash and equivalents ended the period at $27.6 billion.
Due to solid demand, the automaker is doubling its annual F-150 Lightning production to 150,000 trucks. Management predicts EVs to account for up to half of its global vehicle sales volume by 2030.
Ford stock hovers at around $22, up 148% over the past 12 months. Shares are trading at 10.5 times forward earnings and 0.64 times trailing sales.
The 12-month median price forecast for Ford Motor stands at $23. A potential decline toward $20 would improve the margin of safety.
Consumer Cyclical Stocks: Home Depot (HD)
52-week range: $246.59 – $420.61
Dividend Yield: 1.80%
Home Depot, the largest home improvement specialty retailer worldwide, operates around 2,300 warehouse-format stores across North America.
The work-from-home trends that grew during the pandemic has provided tailwinds for the group. Many Americans have also been remodeling their homes, leading to more trips to a local Home Depot.
The retailer released Q3 2021 results on Nov. 16. Sales increased 10% YOY to $36.8 billion. Net earnings came in at $4.1 billion, or $3.92 per diluted share, up from $3.4 billion in the prior-year period. Cash and equivalents ended the quarter at $5.07 billion.
HD stock changes hands around $350, up 25% over the past year. Shares are trading at 26.7 times forward earnings and 3 times trailing sales.
The 12-month median price forecast for Home Depot stock is $427.50. If you believe, Home depot’s strong brand recognition and network size will continue to bring in revenue and profits, then the stock deserves your attention.
Invesco S&P SmallCap Consumer Discretionary ETF (PSCD)
52-Week Range: $91.05 – $126.08
Dividend Yield: 0.61%
Expense Ratio: 0.29% per year
Our next discussion introduces an exchange-traded fund (ETF). The Invesco S&P SmallCap Consumer Discretionary ETF invests in small-capitalization (cap) consumer discretionary names. The fund began trading in 2010.
PSCD has 86 holdings and tracks the S&P SmallCap 600 Capped Consumer Discretionary Index. The top 10 holdings account for close to a third of net assets of $49.6 million.
The leading names in the roster include jewelry retailer Signet Jewelers (NYSE:SIG); builder of single-family homes Meritage Homes (NYSE:MTH); car retailer Asbury Automotive (NYSE:ABG); OEM components provider LCI Industries (NYSE:LCII); and automotive retail operator Group 1 Automotive (NYSE:GPI).
The ETF is up over 4% over the past 12 months, and hit an all-time high (ATH) in June 2021. However, the fund has declined 12% YTD.
Forward price-to-earnings (P/E) and price-to-book (P/B) ratios stand at 9.63x and 2.52x. Interested readers could regard the recent decline as an opportunity to buy PSCD.
Consumer Cyclical Stocks: Nike (NKE)
52-week range: $125.44 – $179.10
Dividend yield: 0.82%
Nike, the iconic sports brand, is well-known for its athletic footwear, apparel, and accessories. In recent years, it has enjoyed strong demand not only in the U.S. but also worldwide.
Management issued Q2 FY22 results in late December. Revenue increased only 1% YOY to $11.4 billion. Yet net income went up by 7% YOY to $1.3 billion, or 83 cents per diluted share. Cash and equivalents ended the period at $10.75 billion.
Nike’s digital sales increased 12% YOY led by high growth in North America. But, despite strong demand trends in the U.S., sales in China plunged. As a result, the group’s overall growth stalled. Investors have been scratching their heads over recent losses in China.
Meanwhile, the recent acquisition of RTFKT should allow Nike to capitalize on the booming non-fungible token (NFT) trend. RTFKT specializes in “leveraging cutting edge innovation to deliver next-generation collectibles that merge culture and gaming.”
NKE stock hovers slightly above $142, up 1% over the past 12 months. Shares are trading at 48 times forward earnings and 5.9 times trailing sales. The 12-month median price forecast for NKE stock stands at $185.
Consumer Cyclical Stocks: Royal Caribbean Cruises (RCL)
52-week range: $64.20 – $99.24
Royal Caribbean Cruises is the second-largest cruise company worldwide, operating 60 ships.
Along with its other cruise peers, RCL has suffered greatly during the pandemic. As the pandemic is not fully behind us, investing in the company might mean a leap of faith.
The cruise operator released Q3 2021 results in late October. Revenue stood at $457 million. Adjusted net loss was $1.2 billion, or $4.91 per share. Cash and equivalents ended the quarter at $3.3 billion.
RCL’s $20 billion debt and related interest expenses could easily hamper its free cash flow generation potential in 2021. So we might see additional debt or equity issued in the coming quarters.
The stock trades around $82, up 11% over the past 12 months. We see the 12-month median price forecast for RCL stock at $94.
Interested readers should do further due diligence on Royal Caribbean shares, as well as the cruise industry, before hitting the buy button.
Consumer Cyclical Stocks: TJX Companies (TJX)
52-week range: $61.15 – $77.35
Dividend Yield: 1.51%
TJX Companies is a well-known off-price retailer of apparel and merchandise for the home. The retailer is the parent company of T.J. Maxx, Marshalls and HomeGoods. Management sources products from a large network of vendors.
The retailer issued Q3 FY22 results on Nov. 17. Revenue increased 24% YOY to $12.5 billion. Net income came in at $1.0 billion, or 84 cents per diluted share, up from $867 million a year ago.
Cash and equivalents ended the quarter at $6.8 billion. Wall Street was pleased with the robust demand the company enjoyed and the fact that it has coped well with supply.
TJX stock hovers at $67, pretty much flat over the past year. Share price looks stretched at 22 times forward earnings and 2 times trailing sales.
The 12-month median price forecast for TJX stock is $88. A decline below the $67 level would improve the margin of safety.
Vanguard Consumer Discretionary Index Fund ETF Shares (VCR)
52 Week Range: $264.51 – $360.54
Dividend Yield: 0.85%
Expense Ratio: 0.1% per year
Our final choice is another ETF, namely, the Vanguard Consumer Discretionary Index Fund ETF. The fund was first listed in January 2004. VCR has 304 holdings and tracks the Consumer Discretionary Spliced Index. Assets under management currently stand at $8.3 billion.
The top 10 stocks account for almost 60% of the fund. Among the leading names in the portfolio are Amazon (NASDAQ:AMZN), Tesla (NASDAQ:TSLA), Home Depot, Nike, McDonald’s (NYSE:MCD), and Lowe’s (NYSE:LOW).
VCR has gained nearly 5% over the past year and hit a record high in November. Yet, so far in 2022, the fund has declined almost 12%. Interested investors may use the recent dip as a buying opportunity.
On the date of publication, Tezcan Gecgil 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.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
