Vaccines and stimulus payments have boosted consumer confidence.
Some stocks are more tied to the ebbs and flows of the economic cycle than others. These types of stocks have been coming back into favor in recent months as government stimulus checks have hit bank accounts and vaccines have been gaining a wider foothold, brightening the outlook for consumer spending. These cyclical stocks include airlines that stand to do well as travel improves, companies that sell goods that consumers tend to buy when they have more money, natural resources companies that produce products used in manufacturing and banks that benefit as long-term interest rates rise. “We believe we have entered what we call ‘the new vaccine-induced business cycle’ and bull market,” says James Demmert, founder and managing partner with Main Street Research. “COVID created a recession and the vaccine will allow the economy to get back up and running.” Here are seven of the best cyclical stocks to buy, as recommended by experts.
TJX Companies (ticker: TJX)
Consumer discretionary companies are a key component of cyclical investing as people tend to spend more when they are more secure in their jobs and economic expectations. TJX Companies is a leading discount retailer that Ryan Johnson, director of portfolio management and research at Buckingham Advisors, says “should benefit from plentiful merchandise being available from permanently closed stores and from customers returning to stores.” Although the company has underperformed the broader consumer discretionary sector, Johnson says sales should rebound to a new high in 2021 and grow about 8% for the following several years, with earnings potentially growing in double digits. He says the company has a long-term opportunity to drive sales by adding more locations for its stores, which include the T.J. Maxx and HomeGoods brands.
LVMH Moet Hennessy Louis Vuitton (LVMUY)
If companies don’t have much ability to raise prices during inflationary periods — such as those that accompany expanding economic cycles — they can see their earnings potential eroded. “Very strong economies have a tendency to create inflation,” Demmert says. “Make sure to buy stocks that have pricing power — the ability to raise prices.” One of the cyclical stocks Demmert points to is French luxury goods company LVMH Moet Hennessy Louis Vuitton. Wealthy customers are already willing to pay more for luxury items, so keeping ahead of inflation shouldn’t be too hard for LVMH, which makes everything from luxury handbags to top-shelf liquor.
Honeywell International (HON)
Companies in the industrials sector stand to do well when the economy is going gangbusters. Within that sector, Johnson points to Honeywell International because of its exposure to the commercial airline industry. From aircraft engines and wireless connectivity to repairs and cabin electronics, the industrial conglomerate says its “products and services are found on virtually every commercial, defense and space aircraft in the world.” Honeywell’s aerospace segment is its single biggest revenue provider, but the company is also involved in advanced materials, building products and other businesses. “As commercial flights recover, industrial activity increases and construction stays strong, the company will benefit,” Johnson says. He expects earnings to grow by double digits for the next several years.
The Walt Disney Co. (DIS)
Disney’s expansion into streaming content was its saving grace during the pandemic. As people increasingly worked, learned and entertained themselves online, the company saw subscribers to its Disney+ streaming service surpass 100 million in a fraction of the time it took Netflix (NFLX) to hit that mark. Even though the service isn’t yet profitable as Disney invests heavily in the business and keeps prices low, Disney+ is the main reason the company’s stock trades near record highs. Disney’s parks division and ESPN ownership were hard hit as governments shuttered theme parks and sporting events. But as those reopen as the vaccines take hold, Disney appears to be in a strong position. Even though Disney shares are in record territory, Will Reese, director of equity research at UMB Bank, says they have room to advance. His price target of $200 is more than 7.2% higher than Monday’s close.
Southwest Airlines (LUV)
The S&P 500 industrials sector includes not only manufacturing companies but also transportation firms. When the economy expands, rail and trucking companies benefit as companies order more raw materials and customers purchase more goods. Airlines are also cyclical stocks, benefiting from increased travel demand. Demmert points to Southwest Airlines. Although the airline industry is still on the mend due to the pandemic, it seems like the clouds may be parting a little. On Sunday, more than 1.5 million people passed through Transportation Security Administration airport checkpoints, according to administration data. While that’s still well under the number from the same date in 2019, it’s much higher than the mere 90,510 from the same date in 2020.
Regions Financial Corp. (RF)
When the economy really picks up steam, interest rates often rise on inflation expectations. Inflation worries have also been heightened by easy monetary policy from the Federal Reserve, the massive government spending on stimulus packages and potential future spending on infrastructure. 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, increasing net interest margin, one of the key metrics for bank profitability. For a regional bank pick, Demmert points to Regions Financial. The company has more than made up for ground it lost during the early days of the pandemic and is trading at its highest levels since 2007.
Goldman Sachs (GS)
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 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, Tony Lucas, vice president and branch manager with Wedbush Securities, points to Goldman Sachs. Goldman Sachs’ “key source of earnings stability is its business diversification,” Lucas says. “Within traditional banking, a diversified product portfolio has better chances of sustaining growth than many other banks, which have exited some of these areas.”
Seven of the best cyclical stocks to buy now:
— TJX Companies (TJX)
— LVMH Moet Hennessy Louis Vuitton (LVMUY)
— Honeywell International (HON)
— The Walt Disney Co. (DIS)
— Southwest Airlines (LUV)
— Regions Financial Corp. (RF)
— Goldman Sachs (GS)
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