Cyclical industries are those that are economically sensitive. Therefore, cyclical stocks come from such industries where profits depend on the business cycle. There are four basic types of cyclical stocks; basic materials, consumer cyclical, financial services, and real estate.
The end of the pandemic has put the limelight on cyclical stocks, which usually perform well during periods of economic boom. In good times, such names can even outperform the broader market. Conversely, their value usually falls during downturns, in line with sluggish sales and declining profits.
The Consumer Price Index (CPI) for February rose 7.9% over the previous year, marking its fastest growth in four decades. Yet, despite soaring inflation levels, the National Retail Federation (NRF) annual report released last week forecasts strong retail sales growth of between 6%-8% for 2022. Put another way, cyclical stocks could easily gain momentum along with the broader economy.
Long-time InvestorPlace.com readers may already know that cyclical stocks can be choppy. In fact, many of these names have come under pressure since January. Yet, they also tend to have lower valuations and offer higher upside potential than defensive stocks.
With that information, here are seven cyclical stocks to buy after a correction:
- Expedia Group (NASDAQ:EXPE)
- Home Depot (NYSE:HD)
- Innovative Industrial Properties (NYSE:IIPR)
- Macy’s (NYSE:M)
- Nucor (NYSE:NUE)
- SPDR S&P Homebuilders ETF (NYSEARCA:XHB)
- Sunrun (NASDAQ:RUN)
Cyclical Stocks: Expedia Group (EXPE)
52-week range: $136.77 – $217.72
First up is the Seattle-based Expedia, one of the largest online travel agencies globally. The company operates several travel websites, including Expedia.com, Travelocity, Hotels.com, CheapTickets, CarRentals and Orbitz.
Expedia reported fourth-quarter 2021 results on Feb. 10. Revenue soared 148% year-over-year (YOY) to $2.28 billion. Net income turned positive and came in at $276 million, or $1.70 per diluted share, compared to a net loss of $412 million in the prior-year quarter. Cash and equivalents ended the quarter at $4.3 billion.
Compared to pre-pandemic Q4 2019 metrics, the results represent a 17% drop in revenue and a 25% decline in gross bookings. Expedia needs the international markets segment to perform with the same success as its domestic operations to achieve complete topline recovery.
CEO Peter Kern predicts that “Summer 2022 will be the busiest travel season ever.” Management anticipates a mid-single-digit compounded annual growth rate (CAGR) in revenue and a doubling of profit margins until 2025.
EXPE stock hovers around $193 territory, up 7% over the past year. Shares are trading at 26.3 times forward earnings and 3.12 times trailing sales. The 12-month median price forecast for Expedia stock stands at $215.50.
Home Depot (HD)
52-week range: $284.20 – $420.61
Dividend Yield: 2.23%
Home Depot is the largest home improvement specialty retailer worldwide, operating roughly 2,300 warehouse-format stores across North America. The robust housing market continues to boost Home Depot’s operations.
The retailer benefits from rising home prices, as it encourages homeowners to remodel their homes. As a result, the average customer purchases were up 12.3% YOY in the fourth quarter.
Home Depot released Q4 2021 results on Feb. 22. Revenue increased 10.7% YOY to $35.7 billion. Net earnings came in at $3.4 billion, or $3.21 per diluted share, up from $2.9 billion in the prior-year quarter. Cash and equivalents ended the period at $2.3 billion.
Economist debate the sustainability of the housing market boom as interest rates creep higher. Meanwhile, Home Depot projects flat revenue throughout 2022.
HD currently trades at $340, down 18% year-to-date (YTD). Shares have a favorable valuation at 19.08 times forward earnings and 2.2 times trailing sales. Finally, the 12-month median price forecast for Home Depot stock is $382.
Cyclical Stocks: Innovative Industrial Properties (IIPR)
52-week range: $162.81 – $288.02
Dividend Yield: 3.51%
Park City, Utah-based Innovative Industrial Properties is a real estate investment trust (REIT) that provides real estate capital to the cannabis industry stateside. It specializes in sale-leaseback deals, which involve buying cannabis operator properties and leasing them back.
IIPR announced Q4 2021 results on Feb. 23. Total revenue soared 59% YOY to $58.9 million. Net income came in at $28.3 million, or $1.14 per diluted share, up from $21 million in the prior-year quarter. Cash and equivalents ended the period at $81 million.
In 2021, adjusted funds from operations increased 78% YOY to $175 million. In addition, the company increased the size of its portfolio by 37 properties to 103 during the year. The average lease length currently stands at around 16.6 years, so the company boasts a predictable cash flow stream over the long term.
IIPR stock is priced around $204, down almost 22% YTD. Shares trade at 30.9 times forward earnings and 24 times trailing sales. The 12-month median price forecast for IIPR stands at $264.
Macy’s (M)
52-week range: $14.76 – $37.95
Dividend Yield: 2.28%
Leading retailer Macy’s operates around 600 stores under the Macy’s brand, over 58 stores under the Bloomingdale brand, as well as another 160 freestanding Bluemercury specialty beauty stores.
Macy’s issued Q4 2021 results on Feb. 22. Sales jumped 28% YOY to $8.7 billion. Adjusted net income came in at $745 million, or $2.45 per diluted share, up from $253 million in the prior-year quarter. Cash and equivalents ended the period at $1.7 billion.
Comparable sales increased 6.1% relative to Q4 2019, fueled by 36% growth in digital sales during the quarter. Digital sales accounted for 39% of total revenue, up from 30% in 2019. However, the retailer projects overall revenue to remain relatively flat in 2022.
Macy’s stock hovers currently slightly below $27, up 46% over the past year. Valuation looks attractive at 5.7 times forward earnings and 0.3 times trailing sales. The 12-month median price forecast for Macy’s stock is $30.
Cyclical Stocks: Nucor (NUE)
52-week range: $66.92 – $143.23
Dividend yield: 1.47%
Charlotte, North Carolina-based Nucor is the largest steel producer in North America. It boasts a highly diversified business with a product portfolio that includes carbon and alloy steel in sheets, bars, and plates.
Nucor released Q4 2021 results on Jan. 27. Revenue soared 97% YOY to $10.36 billion. Net income came in at $2.25 billion, or $7.97 per diluted share, up from $399 million a year ago. Cash and equivalents ended the quarter at $2.76 billion.
Management has announced investments of about $9 billion during the past five years, which are already beginning to generate returns. In fact, these investments helped Nucor achieve its most profitable year in 2021. Meanwhile, the infrastructure bill should further boost infrastructure spending for the foreseeable future, bolstering steel demand.
Nucor has increased its dividend every year for the last 49 years and is one year away from receiving Dividend King status, which should happen in 2022. NUE stock currently generates a dividend yield of 1.47%.
NUE shares currently hover at $140 territory, having traded at its all-time high on March 16 at $140.78. It is currently up more than 91% over the past 12 months and 23% YTD. Shares trade at 6.3 times forward earnings and 1.1 times trailing sales. The 12-month median price forecast for Nucor stock stands at $117.20. We favor a wait-and-see approach to buy at better prices.
SPDR S&P Homebuilders ETF (XHB)
52-Week Range: $63.97 – $86.61
Dividend Yield: 0.64%
Expense Ratio: 0.35% per year
Our next discussion centers around an exchange-traded fund (ETF), namely the SPDR S&P Homebuilders ETF. The fund includes sub-industries such as building products, home improvement, retail furnishings, and household appliances. The fund started trading in January 2006.
XHB which tracks the S&P Homebuilders Select Industry Index, has 35 holdings. With regards to sub-sectors, we see Building Products (41.83%), Homebuilding (32.57%), and Home Improvement (10.82%), among others. The top 10 stocks in the portfolio account for 42% of $1.51 billion net assets.
The leading names in the fund include building and industrial materials provider Owens Corning (NYSE:OC), building materials manufacturer Builders FirstSource (NYSE:BLDR), home improvement retailer Lowe’s Companies (NYSE:LOW), home products retailer Williams Sonoma (NYSE:WSM), and Allegion (NYSE:ALLE) which is an Ireland-based mechanical and electronic security products manufacturer.
The ETF is trading around $70 after hitting a 52-week low of $63.97 on Feb. 24. It is down over 17% YTD. Price-to-earnings (P/E) and price-to-book ratios (P/B) stand at 10.11 and 2.74, respectively.
Cyclical Stocks: Sunrun (RUN)
52-week range: $18.61 – $64.62
Our final recommendation is Sunrun, one of the leading providers of residential solar panels and home batteries stateside. The company offers home solar service plans and battery solutions that make clean energy more accessible for regular consumers.
Sunrun issued Q4 2021 results on Feb. 17. Revenue increased 36% YOY to $435 million. Net loss declined to $38.5 million, or 19 cents per share, down from $169 million in the prior-year quarter. Cash and equivalents ended the period at $850 million.
In 2021, Sunrun reported a 31% YOY growth in new solar energy installations, reflecting its highest growth rate in five years. In addition, strong customer orders led to backlog growth of 57% for full-year 2021. Annual recurring revenue stood at $851 million with average contract life remaining of 17.4 years.
RUN stock is priced at $30, down more than 46% over the past year. Shares hit a 52-week low of $18.61 on Feb. 24, but since rebounded 57%. Shares are trading at 70.92 times forward earnings and 3.75 times trailing sales. Meanwhile, the 12-month median price forecast for Sunrun stock is at $45.50.
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.
