A cyclical stock is one that produces returns that are influenced by macroeconomic or systematic changes in the broader economy. In strong economic times, these stocks show generally strong growth because they are influenced by discretionary consumer spending. Of course, that means the opposite is true as well. When the economy is weak, these stocks may pull back further than other stocks.
Cyclical stocks cover many sectors, but travel and entertainment stocks come to mind. Airlines, hotels, and restaurants are all examples of cyclical sectors that do well during times of economic growth but are among the first to pull back in recessionary times.
Why do cyclical stocks deserve a place in an investor’s portfolio? Believe it or not, it’s for the relative predictability that they provide. Investors may enjoy speculating in growth stocks, but these are prone to bubbles. This isn’t to say that cyclical stocks are not volatile, but they offer price movement that is a bit more predictable.
In this special presentation, we’re looking at cyclical stocks that are looking strong as we come out of the pandemic. And some of these stocks held up well during the pandemic which means they’re starting from a stronger base.
Quick Links
- Starbucks
- McDonald’s
- Marriott International
- Costco
- General Motors
- JPMorgan Chase
- Southwest Airlines
#1 - Starbucks (NASDAQ:SBUX)
Starbucks (NASDAQ:SBUX) is back in growth mode. After four consecutive quarters of year-over-year declines in the company’s revenue, Starbucks posted a YOY rise in revenue in its Q2 earnings report in late April.
Revenue wasn’t the only thing that suffered. The company’s bottom line took a hit as well. However, those concerns may be a bit overstated. Since posting negative earnings per share in the company’s third-quarter earnings report (the three months ending in June 2020), Starbucks has been posting steadily increasing earnings. And while they’re not quite at the level they were pre-pandemic things are trending in the right direction.
And it has to be noted that Starbucks raised its dividend in 2020, which is no small feat. A bearish argument will be that the dividend looks a bit unsustainable in lieu of last year’s earnings. But that ratio will improve as profits rise and that means there should be no near-term problem for the dividend.
About Starbucks
Starbucks Corporation, together with its subsidiaries, operates as a roaster, marketer, and retailer of coffee worldwide. The company operates through three segments: North America, International, and Channel Development. Its stores offer coffee and tea beverages, roasted whole beans and ground coffees, single serve products, and ready-to-drink beverages; and various food products, such as pastries, breakfast sandwiches, and lunch items.
Read More - Current Price
- $98.26
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 18 Buy Ratings, 8 Hold Ratings, 3 Sell Ratings.
- Consensus Price Target
- $102.81 (4.6% Upside)
#2 - McDonald’s (NYSE:MCD)
The pandemic proved that McDonald’s (NYSE:MCD) may be less of a defensive stock than imagined. One of the hallmarks of the company’s pre-pandemic business was its breakfast menu. But those sales quickly dried up when workers no longer had morning commutes.
That being said, the company navigated the pandemic quite well. But its business will find itself under pressure as digital and mobile ordering complete with delivery becomes the norm.
As the pandemic showed, McDonald’s is well equipped to handle this pivot. In fact the company has made the three D’s of digital, delivery, and drive-thru the focus of its business going forward. In fact, management reported that 75% of McDonald’s global footprint of stores (approximately 30,000 stores) now offers delivery.
Like so many stocks, McDonald’s saw its profits tumble in the second quarter of 2020. However earnings bounced back quickly. And if the first quarter is any indication, revenue will likely show strong year-over-year gains in 2021.
About McDonald's
McDonald's Corporation operates and franchises restaurants under the McDonald's brand in the United States and internationally. It offers food and beverages, including hamburgers and cheeseburgers, various chicken sandwiches, fries, shakes, desserts, sundaes, cookies, pies, soft drinks, coffee, and other beverages; and full or limited breakfast, as well as sells various other products during limited-time promotions.
Read More - Current Price
- $290.89
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 18 Buy Ratings, 12 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $319.46 (9.8% Upside)
#3 - Marriott International (NASDAQ:MAR)
The hotel sector was one of the hardest hit by the pandemic. And the stock chart of Marriott International (NASDAQ:MAR) shows the effect of pent-up demand. For the first two months of the year, MAR stock charged to a 52-week high. But since then the stock has lost over 10%. However with one of the largest footprints in the United States, Marriott looks like a strong buy-the-dip candidate.
The company helped itself with its latest earnings report. Adjusted earnings beat analysts’ expectations by four cents. And while revenue was a slight miss, the company posted a sequential gain and, more significantly management said that occupancy rates were increasing in correlation with the Covid-19 vaccine rollout.
In fact, Marriott says demand is rebounding rapidly in several key areas. That will be a key metric to watch as investors will be looking for solid beats of pandemic revenue numbers.
Like many companies, Marriott suspended its dividend early on in the pandemic. It has not given guidance for when the dividend may be reinstated.
About Marriott International
Marriott International, Inc engages in operating, franchising, and licensing hotel, residential, timeshare, and other lodging properties worldwide. It operates its properties under the JW Marriott, The Ritz-Carlton, The Luxury Collection, W Hotels, St. Regis, EDITION, Bvlgari, Marriott Hotels, Sheraton, Westin, Autograph Collection, Renaissance Hotels, Le Méridien, Delta Hotels by Marriott, Tribute Portfolio, Gaylord Hotels, Design Hotels, Marriott Executive Apartments, Apartments by Marriott Bonvoy, Courtyard by Marriott, Fairfield by Marriott, Residence Inn by Marriott, SpringHill Suites by Marriott, Four Points by Sheraton, TownePlace Suites by Marriott, Aloft Hotels, AC Hotels by Marriott, Moxy Hotels, Element Hotels, Protea Hotels by Marriott, City Express by Marriott, and St.
Read More - Current Price
- $280.18
- Consensus Rating
- Hold
- Ratings Breakdown
- 6 Buy Ratings, 13 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $259.00 (7.6% Downside)
#4 - Costco (NASDAQ:COST)
Costco (NASDAQ:COST) shouldn’t be on this list, should it? After all, people shop at Costco no matter what the economic conditions right? It’s fair to say that Costco can meet the definition of a defensive stock. However, there’s a segment of the population that’s getting out and about in ways they haven’t done in more than a year.
And that seems to be good news for Costco, which I like more for its technical setup. COST stock has strong support at levels not too far below its price (as of this writing) of $377.35. That takes a lot of the risk out of this stock and creates a scenario under which the stock looks like it has room to run.
Analysts seem to agree. While the consensus price target is around $390, recent price targets are significantly higher. And Costco reports earnings at the end of May. A strong report will add support to these projections and would likely raise the floor on COST stock.
About Costco Wholesale
Costco Wholesale Corporation, together with its subsidiaries, engages in the operation of membership warehouses in the United States, Puerto Rico, Canada, Mexico, Japan, the United Kingdom, Korea, Australia, Taiwan, China, Spain, France, Iceland, New Zealand, and Sweden. The company offers branded and private-label products in a range of merchandise categories.
Read More - Current Price
- $928.08
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 18 Buy Ratings, 9 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $908.81 (2.1% Downside)
#5 - General Motors (NYSE:GM)
Automakers, like hotels, are also considered a traditional cyclical stock. And right now, General Motors (NYSE:GM)is one of the strongest of the automaker stocks. The reason for this optimism is strength in the electric vehicle (EV) sector. This may surprise investors who were looking elsewhere as the EV bubble blew up in late 2020. However, GM is engaged in a triple joint venture with two Chinese automakers (SAIC and Wuling Automobiles) and is making significant inroads.
GM is also showing strength off of its latest earnings report in which it beat earnings estimates by a whopping $1.20. Automakers in general, and EV manufacturers particularly will remain under pressure from the global chip shortage. And GM is not immune to that.
After more than doubling since the onset of the pandemic, GM stock has become range-bound. However, the stock looks to have support between $55 and $56 per share which makes the stock a low-risk way to invest in the emerging EV market.
About General Motors
General Motors Company designs, builds, and sells trucks, crossovers, cars, and automobile parts; and provide software-enabled services and subscriptions worldwide. The company operates through GM North America, GM International, Cruise, and GM Financial segments. It markets its vehicles primarily under the Buick, Cadillac, Chevrolet, GMC, Baojun, and Wuling brand names.
Read More - Current Price
- $54.88
- Consensus Rating
- Hold
- Ratings Breakdown
- 11 Buy Ratings, 6 Hold Ratings, 4 Sell Ratings.
- Consensus Price Target
- $56.92 (3.7% Upside)
#6 - JPMorgan Chase (NYSE:JPM)
Bank stocks are another notoriously cyclical sector. And if you’re looking at bank stocks, you could do far worse than considering JPMorgan Chase (NYSE:JPM). This isn’t a story about cryptocurrency or fintech services, although the company is pivoting into both areas. In fact, the low-interest rate environment is generally a drag on banks.
However, JPM stock dropped just 5% in 2020 and the stock is up 25% for the year. Not only that, but it’s up approximately 50% over the last 12 months. And the bank followed up a strong fourth quarter with an equally strong first quarter. The bank beat earnings estimates by $1.53 and beat on revenue by nearly $2 billion ($1.96 billion).
Recent price targets give the stock some upside. However at this time, JPM stock looks to be consolidating so if you’re not in the stock yet, you may want to wait for a better entry point.
About JPMorgan Chase & Co.
JPMorgan Chase & Co operates as a financial services company worldwide. It operates through four segments: Consumer & Community Banking (CCB), Corporate & Investment Bank (CIB), Commercial Banking (CB), and Asset & Wealth Management (AWM). The CCB segment offers deposit, investment and lending products, cash management, and payments and services; mortgage origination and servicing activities; residential mortgages and home equity loans; and credit cards, auto loans, leases, and travel services to consumers and small businesses through bank branches, ATMs, and digital and telephone banking.
Read More - Current Price
- $240.78
- Consensus Rating
- Hold
- Ratings Breakdown
- 10 Buy Ratings, 7 Hold Ratings, 2 Sell Ratings.
- Consensus Price Target
- $229.31 (4.8% Downside)
#7 - Southwest Airlines (NYSE:LUV)
Perhaps no economic barometer has been more closely watched than the airline industry. One stock that has looked poised to benefit from an economic recovery is Southwest Airlines (NYSE:LUV). The airline is not beholden to international flights. Nor has it historically relied on business travel.
This means the airline looks to be exactly where the economic recovery will be. That is domestic flights for leisure travelers. And that market will only increase as the vaccination rollout continues to gain steam. Inflation may be something to watch because it took away some of the consumer’s buying power. But Southwest has always been known as a low-fare airline that should help support passenger travel.
LUV stock is up 32% for the year. But shares appear to be consolidating at the moment which is setting up a nice leg up for the stock. Another positive catalyst for the stock is that institutional investors are buying more of the stock.
Like several cyclical stocks, Southwest suspended its dividend and there’s no indication of when they may reinstate it.
About Southwest Airlines
Southwest Airlines Co operates as a passenger airline company that provides scheduled air transportation services in the United States and near-international markets. As of December 31, 2023, the company operated a total fleet of 817 Boeing 737 aircraft; and served 121 destinations in 42 states, the District of Columbia, and the Commonwealth of Puerto Rico, as well as ten near-international countries, including Mexico, Jamaica, the Bahamas, Aruba, the Dominican Republic, Costa Rica, Belize, Cuba, the Cayman Islands, and Turks and Caicos.
Read More - Current Price
- $31.77
- Consensus Rating
- Hold
- Ratings Breakdown
- 4 Buy Ratings, 11 Hold Ratings, 3 Sell Ratings.
- Consensus Price Target
- $30.78 (3.1% Downside)
As this list of stocks shows cyclical stocks can be volatile. This volatility can cause investors to shy away from investing in cyclical stocks. But that would be a mistake. Because some of these stocks can hold up well during rough times and if investors stay away from the segment entirely, they can miss out on strong gains.
For example, at the onset of the 2020 Covid-19 pandemic, the entire market had a sharp selloff. And cyclical stocks were among the hardest hit. However, once investors took a closer look they realized the selloff was overdone. This allowed airline stocks and hotel stocks to make strong rallies in 2020.
And cyclical stocks can be good hedges against the volatility that can come with speculative stocks. One way to add cyclical stocks to your portfolio with even less risk is to invest in exchange-traded funds (ETFs). One of the best ETFs that provides exposure to cyclical stocks is the SPDR Consumer Discretionary Select Sector Fund (NYSEARCA:XLY).
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