Investing in the economic cycle is a funny beast. Most of the time, the cycle is your friend when times are good: People are buying stuff and consumer stocks are rising. When the market is worried about recession, as it was late last year, you need new friends.
[Sign up for stock news with our Invested newsletter.]
One answer to the boom-and-bust of the market is to mix cyclical investing with some attention paid to companies driving secular changes in cyclical industries. The best pick in a cyclical-stocks list U.S. News published eight months ago was Salesforce Inc. (ticker: CRM), up more than 60% since, because the company has benefited from more sales activity in a faster-growth economy, but also because it’s moving customer relationship management to cloud computing technology. The fact Salesforce fell sharply in 2022 is another factor in this year’s gain. Another strategy is to bet on luxury companies, because rising wealth levels in an expansion almost always help such businesses.
This list of cyclical stocks to buy now attempts to blend those that will benefit from the receding of recession fears with those that can exploit secular change, where possible. They should be expected to succeed if inflation stays tame, consumer confidence keeps rising and interest rates drift lower next year.
Here are six of the best cyclical stocks to buy now:
| ETFs | Year-to-date gain (as of Aug. 30 close) |
| Uber Technologies Inc. (UBER) | 88.1% |
| Tesla Inc. (TSLA) | 108.6% |
| Bayerische Motoren Werke AG (OTC: BMWYY) | 29.6% |
| LVMH Moet Hennessy Louis Vuitton (OTC: LVMUY) | 22.1% |
| Amazon.com Inc. (AMZN) | 60.8% |
| Toll Brothers Inc. (TOL) | 65.2% |
Uber Technologies Inc. (UBER)
Shares of the San Francisco-based ridesharing company have been on a tear, rising 88% this year as Uber has turned to profitability and seen its operating cash flow rise 176% year over year in the second quarter. It’s an inflection-point company, one that has finally achieved enough scale to make money and will now see profits rise fast, Evercore ISI analyst Mark Mahaney says. Analyst Angelo Zino of CFRA Research says free cash flow could hit $5 billion next year, up from $3 billion this year. If it does, there are more stock gains coming, he reasons.
Down the road, Uber may also get a boost from self-driving cars, which will let it move toward a hybrid model of using drivers on some routes while others are served by autonomous vehicles. Zino says that will unleash a virtuous cycle of falling prices, because there would be no need to pay drivers on those routes, spurring higher usage and more profitability for Uber. That scenario may take time to develop, and Uber got out of the business of developing its own autonomous car a while ago. But it is expected to partner with players like General Motors Co.’s (GM) Cruise AV venture and Alphabet Inc.’s (GOOG, GOOGL) Waymo to deliver driverless rides.
Tesla Inc. (TSLA)
Yes, Tesla’s the biggest EV pure-play company in the world, with China’s BYD nipping at its heels, but that is not new. The new part is that the Cybertruck is about to begin shipments, which holds the potential to catalyze the next stage of the company’s growth. Though some sources are claiming the Texas automaker reportedly has 1.9 million orders pending for the strange-looking truck, that number could be wildly incorrect as it is based on a crowdsourced, self-reported Google spreadsheet and is by no means an authoritative source.
However, its charging network is turning into a real business it can sell to owners of other electric vehicles thanks to new partnerships with Ford Motor Co. (F) and others, which Wedbush analyst Dan Ives thinks can add $10 billion to $20 billion in revenue by 2030. That’s without taking into account Tesla’s plans to broaden its brand by marketing an entry-level sedan, or the possibility that it may one day keep CEO Elon Musk’s oft-repeated promise to enter the auto-taxi business when the technology is ready. On a more prosaic note, U.S. sales of its flagship Model Y crossover virtually doubled in the second quarter.
The stock is expensive on paper; it usually is, and it’s volatile, too. Up more than 100% this year, it’s still down around 6% over the previous 12 months and is still commanding more than 50 times 2024 earnings estimates. It’s also up more than 1,100% over the last five years.
Bayerische Motoren Werke AG (OTC: BMWYY)
BMW exemplifies three themes of the cyclical sector now: It’s a global luxury brand; its EV lineup is technologically innovative, with three models on the U.S. market at price points not much higher than many of its other vehicles; and it stands to benefit from a rebound in car sales if consumer confidence continues to rise.
U.S. car sales in 2022 for all makers were 14.3 million units, well below the 17 million-plus peak of each of the last two economic cycles. That means pent-up demand. So does the fact that the average U.S. light vehicle, at 12.5 years of age, has never been older. After the 2008 financial crisis, a similar dynamic of aging cars and suppressed sales led to a sharp cyclical snapback, and first-half 2023 sales suggest it’s happening again.
At the same time, BMW’s EV lineup has been increasingly well-received. Car and Driver compared its $53,000 i4 sedan favorably with the automaker’s $76,000 M3 sedan. U.S. sales are up by double digits this year across its product line, and up by 952% (off a small base) in its three EV models combined. That puts BMW right on the heels of Ford and General Motors in the race for second place behind Tesla in U.S. EVs.
Shares are up nearly 30% this year, while GM is flat and Ford up marginally. All three are due for a cyclical upturn and are pushing their EV lineups hard. But BMW may have the best combination of luxury brand, cyclical momentum and new products in a strong group that also includes Mercedes Benz Group (OTC: MBGYY).
[READ: 7 Best Consumer and Retail ETFs to Buy Now]
LVMH Moet Hennessy Louis Vuitton (OTC: LVMUY)
The owner of a list of brands everyone knows hasn’t done as well recently as some other consumer stocks, but it has been the envy of its immediate peer group including Tapestry Inc. (TPR), which owns Coach and Kate Spade, and Kering SA (OTC: PPRUY), which owns the Gucci brand. And it stands as a likely winner if the economy gains steam heading into 2024. Already in 2023, its shares are up 22%, besting the S&P 500.
The question for LVMH has been a small decline in operating profit margins, which has caused analysts to reduce earnings estimates after first-half results came out on July 25.
The company sowed confusion by telling analysts spending had slowed among what it called aspirational consumers, despite the revenue gain.
Amazon.com Inc. (AMZN)
A giant retailer, joined with the biggest purveyor of cloud computing services in the world, is a mix built for an economic up cycle, especially after a 54% decline in its stock price from fall 2021 through 2022, says Mahaney, who places Amazon behind only Uber in his top picks. Amazon is up 60% this year, with shares about $50 below their 2021 highs.
Amazon’s stock got hammered for several reasons. Consumer demand growth slipped once Covid stimulus money ended. It had leaned so heavily into expansion during Covid that its retail business even turned unprofitable as expenses climbed. And corporations tapped the brakes on cloud computing contracts, slowing first-quarter growth in that business to 11%, compared with 37% in 2019, Mahaney said.
This year, Amazon’s $3.2 billion second quarter operating profit in North American retail reversed a $627 million loss a year earlier. The cloud division seemed to have reached a bottom, Mahaney said, as revenue climbed 12%.
Companywide, Amazon says third-quarter operating profit will more than double. Forty of 41 analysts who follow the stock recommend it, with the average price target calling for a 32% gain in a year, according to TipRanks.
Toll Brothers Inc. (TOL)
This pick of an upper-end home builder is likely to work best if interest rates begin to drop next year — which most market participants expect to see in the first half of 2024 as inflation expectations drift lower, according to the CME FedWatch Tool.
New homes are having a moment because sales of existing homes are so weak, thanks to a shortage of homes whose owners are willing to sell and give up their inexpensive existing mortgages. Toll said its sales rose 19% in the fiscal third quarter as profits per share climbed 59%. Shares have risen 70% for the last year and 112% for the last five — and other home builders such as Pulte Group Inc. (PHM) have done nearly as well or even better. The company, which fills what it calls an affordable luxury niche of larger homes selling for about $1 million for move-up buyers, thrives in this environment.
The other edge all home builders have now is a long-term undersupply of new homes since 2010, similar to what is happening in the car market. Toll, citing Realtor.com data, says the U.S. has produced more than 5 million too few homes since 2012. Its balance sheet is full of land it bought before the Covid-driven price surge, setting the stage for solid profit margins. The company’s target market of households making $150,000 and up is growing much faster than the nation as a whole, and 20% of the company’s home buyers pay in cash, limiting the impact of this year’s high rates.
That said, mortgage payments for the other 80% of customers will look less foreboding if interest rates fall off this year’s 20-year peak.
More from U.S. News
10 Best-Performing Stocks of the Past 30 Years
7 Best Regional Bank Stocks to Consider Now
6 Best Cyclical Stocks to Buy Now originally appeared on usnews.com
Update 08/31/23: This story was published at an earlier date and has been updated with new information.
