Energy, financial and industrial stocks stand to benefit as the economy reopens.
As the economic recovery gains steam on the back of increasing vaccination rates, the types of companies investors are putting money into are changing. Worries about inflation have caused growth stocks — which derive much of their value from expectations of future earnings — to have less allure than they did last year. Meanwhile, investors are repositioning themselves in sectors that are more directly linked to the health of the economy, such as energy, financials and industrials. Vaccines aren’t the only thing giving the economy a shot in the arm. “The unprecedented amount of stimulus from the Federal Reserve and U.S. Treasury along with the pent-up savings rate and demand by consumers is sure to unleash massive economic growth akin to a post-war boom, or as some have said another Roaring ’20s,” says James Demmert, founder and managing partner with Main Street Research. Here’s a look at seven of the best stocks to buy now to ride the economic recovery.
Caterpillar (ticker: CAT)
Commodities prices are on the rise as the economy heats up and demand expectations increase for natural resources like oil and copper. This trend is likely to intensify if Washington passes President Joe Biden’s infrastructure plan. Industrials companies like heavy-machinery maker Caterpillar “lie at the core of early cycle economic recoveries” and also benefit from the potential infrastructure bill, says Demmert. Caterpillar’s construction equipment sales stand to benefit from infrastructure legislation, says Will Reese, head of equity research at UMB Bank. And there is a bullish outlook for sales of oil well-servicing products and heavy equipment used in mining, according to Reese. He projects Caterpillar’s earnings will grow by 25% per year over the next three years and gives a price target of $275 per share — which represents nearly 20% upside from CAT’s closing price on Tuesday.
Johnson & Johnson (JNJ)
Cyclical stocks, or those that tend to follow economic cycles, can be riskier than some other types of investments, but that doesn’t mean cautious investors can’t get exposure to companies that will likely benefit from the economic recovery. As investors age, they should decrease the riskier part of their portfolios and increase the amount of more stable investments, such as blue chips that offer stability like Johnson & Johnson, says Kenny Polcari, founder and managing partner with Kace Capital Advisors. So it works well for more risk-averse investors that this health care company — which is one of several to develop a COVID-19 vaccine — also stands to do well as the economy opens up. “Medical supply and device companies will see an unleashing of pent-up demand from delayed procedures and routine doctor visits,” says Hank Smith, head of investment strategy with The Haverford Trust Company, pointing to JNJ as a top pick in that space.
As restaurants and hotels closed or drastically reduced operations amid the pandemic, demand for cleaning supplies and services from Ecolab took a hit. Increased business travel, tourism and away-from-home dining made possible by the vaccine rollout stand to help sales. “Their big end markets are restaurants and hotels,” Smith says. “Those businesses will boom when confidence is restored.” Reese adds that restaurants in particular will be a growth driver for Ecolab as the economy reopens, and he says Ecolab shares can hit $250 — which represents more than 15% upside from current levels.
Chevron Corp. (CVX)
People cooped up at home during the pandemic are itching to travel, meaning there should be a surge in demand for oil if they’re able to do so as vaccines help reopen the economy. The price of oil and shares of companies that produce it have already risen substantially this year — and it’s not even peak summer driving season, Polcari points out. With demand for crude expected to strengthen from a recovery in travel, transportation, manufacturing and other segments of the economy, energy stocks stand to continue their recovery after being decimated last year. Polcari and Demmert both point to Chevron as a way to play the recovery in energy. The stock hasn’t yet made it back to where it was before its pandemic-led crash, but having gained more than 25% this year through yesterday’s close, it’s well on its way.
JPMorgan Chase & Co. (JPM)
Banks benefit when longer-term interest rates rise faster than shorter-term ones, as they have been doing recently due to inflation fears. That means the interest rates banks earn on longer-term loans rise more quickly than the interest rates they have to pay on deposits. “As the economy heats up, interest rates will continue to rise, so investing in banks of all sizes makes sense,” Demmert says. Banks also stand to make more money on lending as the economy does better, consumers borrow more money on credit cards and businesses go into expansion mode. What’s more, banks would have to set aside less money for losses on bad loans in an improving economy, freeing up that money for other purposes. For a large-bank pick, Demmert and Polcari point to JPMorgan, which is the largest bank in the U.S. by assets. Polcari praises the bank’s CEO Jamie Dimon, who since taking the helm in 2005 has led the bank through the global financial crisis, the regulatory changes that followed and the pandemic-sparked economic downturn.
The Boeing Company (BA)
Because the market has priced expectations of economic recovery into some stocks even though the full recovery hasn’t happened yet, stocks such as airlines may not have much more room to grow, says Jake Wujastyk, chief market analyst with TrendSpider. After all, the U.S. Global Jets ETF (JETS) is up more than 20% this year. That said, there are other ways to play the recovery of the airline industry — like with Boeing. “As passenger traffic recovers, airplane orders should increase and be a catalyst for the stock,” Reese says. Although the company’s 737 Max is still grounded in China after two fatal crashes, the plane has been cleared to fly by aviation safety agencies in other countries, including the U.S. Another tailwind for Boeing is news that new orders for its planes in February exceeded cancellations for the first time since November 2019. Reese thinks BA can trade up to $300, nearly 20% above recent levels. Investors should exercise caution, though, as the stock remains volatile.
New coronavirus cases in the U.S. are much lower than they were in January as the vaccination rollout has gained steam. Couple that with fresh stimulus funds in bank accounts and a jobs market that is on the mend and people may feel freer to spend more. And don’t forget about an increase in personal and business travel as things move toward a post-COVID world. With that background, credit card companies stand to do well as they collect fees on an expected increasing number of transactions. The accelerated shift toward digital payments and e-commerce is also a tailwind. Smith likes Mastercard, specifically, as the company “will benefit from an increase in spending,” he says, also noting that “this pandemic has accelerated the trend toward cashless payments.”
Seven stocks to buy as the economy reopens:
— Caterpillar (CAT)
— Johnson & Johnson (JNJ)
— Ecolab (ECL)
— Chevron Corp. (CVX)
— JPMorgan Chase & Co. (JPM)
— The Boeing Company (BA)
— Mastercard (MA)
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Update 03/31/21: This story was published previously and has been updated with new information.