In this article, we discuss 10 best cyclical stocks for inflation. If you want to skip reading about what cyclical stocks are and how they perform during times of surging inflation, you can go directly to 5 Best Cyclical Stocks For Inflation.
What Is A Cyclical Stock?
A stock is said to be cyclical if its business model depends on economic cycles of expansion and recession. A cyclical stock typically performs better in the market when the economy is thriving and businesses are booming. Cyclical stocks are naturally volatile and can prove to be lucrative investments during economic expansion. Companies with a cyclical business model can benefit from price hikes as they can effectively pass on high prices to their consumer base.
Surging Inflation in 2022
The U.S. Bureau of Labor Statistics reported annual inflation rate in the United States had risen to 7.9% this February, the highest it has been since January of 1982. The energy index went up by 25.6 percent year over year. Inflation accelerated for food as the index had risen by 7.9 percent over the past year. The index tracking new vehicles peaked at 12.4%, and the index for used cars and trucks rose 41.2%. Excluding food and energy, core inflation had risen to 6.4%, the highest since August 1982.
The Ukraine Conflict Drives Prices Higher
On February 24, 2022, Russia declared war on Ukraine which caused commodities to attain new all-time highs. During the first week of March, Crude oil almost touched $130 per barrel, the highest it has been since the 2008 crisis. Prices for other commodities such as gold, copper, and nickel skyrocketed as well.
Cyclical stocks are high-risk and high-reward investments that can reap investors handsome profits if investing in them is timed. With businesses pulling out of Russia and investing for expansion in Europe, the global economy is set to stay inflationary for a longer period. Investors can benefit from investing in businesses that are well-positioned to remain profitable amidst strong demand, supply-chain constraints, and surging inflation. Cyclical stocks that are best investments for inflationary periods include The Home Depot, Inc. (NYSE:HD), Exxon Mobil Corporation (NYSE:XOM), and Bank of America Corporation (NYSE:BAC), among others.
Photo by Franki Chamaki on Unsplash
Our Methodology
To find the best cyclical stocks for inflation, we did a careful assessment of companies with cyclical business models and chose the ones that can gain in the current inflationary environment. We narrowed down our selection to stocks that had positive analyst sentiment and were rising in popularity among elite hedge funds. We used Insider Monkey’s database of 924 elite hedge funds to derive the hedge fund sentiment for each stock.
10 Best Cyclical Stocks For Inflation
10. Polaris Inc. (NYSE:PII)
Number of Hedge Fund Holders: 21
Polaris Inc. (NYSE:PII) makes and markets power sports vehicles worldwide. The company operates through six segments: ORV, Snowmobiles, Motorcycles, Global Adjacent Markets, Aftermarket, and Boats. This February, Citi analyst James Hardiman initiated coverage of Polaris Inc. (NYSE:PII) with a Buy rating and a $157 price target. The analyst comments that as supply chain conditions improve, Polaris Inc. (NYSE:PII) can benefit from an improving trade environment.
On January 25, 2022, Polaris Inc. (NYSE:PII) announced that the company generated revenues of $2.17 billion for the fiscal fourth quarter of 2021 and outperformed market consensus by $41.11 million. The company reported earnings per share of $2.16, beating EPS estimates by $0.13. As of April 16, Polaris Inc. (NYSE:PII) has a forward dividend yield of 2.39%, a price-to-earnings ratio of 10.51, and has been consistent with increasing its dividends for over 25 years.
This March, Polaris Inc. (NYSE:PII) announced its plans to expand its distribution facility in Ohio. The expansion of 165,000 square feet would allow for additional rack storage and space to accommodate new automated material handling equipment. It would also create up to 25 new jobs over three years.
Polaris Inc. (NYSE:PII) is one of the best cyclical stocks for inflation because in addition to having the ability to pass on rising prices to consumers, the company has a strong earnings history, has been consistent with growing its dividends, and is expanding its operations to offer more than power sports vehicles. Polaris Inc. (NYSE:PII) is undervalued and a popular stock pick among analysts and value investors.
By the end of the fourth quarter of 2021, 21 hedge funds held long positions in Polaris Inc. (NYSE:PII), up from 15 positions in the preceding quarter. The total stakes of these hedge funds in Polaris Inc. (NYSE:PII) were valued at $194.76 million. Diamond Hill Capital was the leading shareholder in the company at the close of Q4 2021. The fund’s stake amounted to $61.47 million, which covers 0.21% of Diamond Hill Capital’s investment portfolio.
9. Vale S.A. (NYSE:VALE)
Number of Hedge Fund Holders: 25
Vale S.A. (NYSE:VALE) is a Brazilian multinational corporation involved in metals and mining. The company operates through two segments: Ferrous Minerals and Base Metals. On February 24, 2022, Vale S.A. (NYSE:VALE) announced earnings for the fiscal fourth quarter of 2021. According to the company’s earnings report, its earnings per share were valued at $1.46, outperforming market consensus by $0.65. The company’s revenue for the quarter amounted to $12.50 billion. As of March 31, 2022, Vale S.A. (NYSE:VALE) has gained 40.77% over the past six months. As metal prices rise, commodities stocks are expected to fare well during times of inflation.
This March, Jefferies analyst Christopher LaFemina raised his price target on Vale S.A. (NYSE:VALE) to $23 from $20 and maintained a Hold rating on the shares. The analyst has raised his price targets on the metals and mining stocks to support his bullish views on the mining market.
By the end of the fourth quarter of 2021, Vale S.A. (NYSE:VALE) was spotted on 25 hedge fund portfolios. The total stakes of these funds amounted to $1.71 billion of which $434.32 million were of the company’s most prominent shareholder, Fisher Asset Management.
Here’s what Miller Value Partners had to say about Vale S.A. (NYSE:VALE) in its third-quarter 2021 investor letter:
“Vale (VALE) was the top detractor over the quarter, falling 32.6% in sympathy with iron ore’s 48% decline from record highs on China capacity curbs and growing fears of financial issues within the property sector. Vale reported Q2 EBITDA of $11.24Bn, slightly below consensus of $11.47Bn on higher than expected iron ore cash costs. Free cash flow of $6.5Bn (35% annualized yield) came in well ahead of expectations, driving $2.6Bn of stock buybacks and a 1H21 dividend of $7.6Bn, implying year-to-date (YTD) shareholder returns of roughly $13.8Bn (19% of the current market cap). Management maintained FY21 production guidance for iron ore of 315-335 Metric tons (Mt) and lowered year-end 2022 exit capacity to 370Mt (from 400Mt) due to Northern System licensing delays. Additionally, the company hosted their annual Investor Day, outlining new production initiatives aimed at becoming a key supplier to steelmakers in light of decarbonization goals.”
In addition to The Home Depot, Inc. (NYSE:HD), Exxon Mobil Corporation (NYSE:XOM), and Bank of America Corporation (NYSE:BAC), Vale S.A. (NYSE:VALE) is a cyclical stock that investors see an upside in.
8. Marathon Oil Corporation (NYSE:MRO)
Number of Hedge Fund Holders: 40
Global crude oil prices are soaring which is driving the growth of stocks such as Marathon Oil Corporation (NYSE:MRO) which engages in the exploration and production of oil and gas in the United States and internationally. Oil stocks are highly cyclical and volatile investment options but are also known for being lucrative investments during inflationary economic periods.
This February, Marathon Oil Corporation (NYSE:MRO) released its earnings report for the fiscal fourth quarter of 2021 in which it beat both EPS and revenue estimates. The company reported earnings per share of $0.77 and beat expert estimates by $0.21. Moreover, the company generated quarterly revenues of $1.80 billion, up 116.87% year over year, and outperformed market consensus by $255.76 million. On top of this, as of April 18, 2022, the stock has gained 64.19% over the past six months.
On April 11, Truist analyst Neal Dingmann raised his price target on Marathon Oil Corporation (NYSE:MRO) to $34 from $30 and maintained a Buy rating on the shares. The analyst expects “strong share buybacks” from the company after having talks with the management. Moreover, Mr. Dingmann commented that Marathon Oil Corporation (NYSE:MRO) has a headstart on its rivals and has more than adequate inventory to continue its strategic maintenance.
Elite hedge funds and analysts are bullish on Marathon Oil Corporation (NYSE:MRO). Insider Monkey identified 40 hedge funds that held long positions in the stock at the close of Q4 2021. The total stakes of these funds equaled more than $969 million, up from $903.2 million in the preceding quarter with 40 positions. As of December 31, 2021, Holocene Advisors is the leading stakeholder in Marathon Oil Corporation (NYSE:MRO), having stakes of over $153.9 million in the company.
7. Caterpillar Inc. (NYSE:CAT)
Number of Hedge Fund Holders: 53
Caterpillar Inc. (NYSE:CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines worldwide. It is one of the largest construction materials and equipment companies in the world. This March, Wells Fargo analyst Seth Weber initiated coverage of Caterpillar Inc. (NYSE:CAT) with an Equal Weight rating and a $231 price target. As businesses expand their operations, the demand for construction materials and equipment is bound to skyrocket, making Caterpillar Inc. (NYSE:CAT) a top cyclical stock to invest in for inflation.
On January 28, 2022, Caterpillar Inc. (NYSE:CAT) released its earnings for the fiscal fourth quarter of 2021 in which the company beat EPS by $0.43. Caterpillar Inc. (NYSE:CAT) reported earnings per share of $2.69 and generated revenues of $13.80 billion, up 22.81% year over year, beating revenue estimates by $558.88 million. As of March 31, 2022, the stock has gained 14.66% over the past six months.
According to Insider Monkey’s database, Caterpillar Inc. (NYSE:CAT) was on 53 elite hedge fund portfolios at the end of the fourth quarter of 2021. The total stakes of these funds in the company were more than $4.99 billion, up from $4.77 billion in the third quarter of 2021 with 46 positions. The hedge fund sentiment for Caterpillar Inc. (NYSE:CAT) is positive.
Bill & Melinda Gates Foundation Trust is the largest stakeholder in Caterpillar Inc. (NYSE:CAT) as of March 30, 2022. The fund’s stakes in the company are worth more than $2.0 billion, which represents 8.71% of the fund’s Q4 2021 investment portfolio.
Caterpillar Inc. (NYSE:CAT) is a go-to cyclical stock that hedge funds are buying to benefit from inflation. Other stocks popular among analysts and investor circles include The Home Depot, Inc. (NYSE:HD), Exxon Mobil Corporation (NYSE:XOM), and Bank of America Corporation (NYSE:BAC).
6. Ford Motor Company (NYSE:F)
Number of Hedge Fund Holders: 53
Ford Motor Company (NYSE:F) designs, manufactures, markets, and services a range of trucks, cars, sport utility vehicles, electrified vehicles, and Lincoln luxury vehicles worldwide. This January, JPMorgan analyst Ryan Brinkman raised his price target on Ford Motor Company (NYSE:F) to $23 from $20 while maintaining an Overweight rating on the shares.
Investors and analysts are equally bullish on Ford Motor Company (NYSE:F) as the company is set on a path to making half of its vehicles all-electric by 2030. The company is set to benefit from tax incentives announced by the Biden administration for EV makers as part of the government’s plans to go green. As the economy booms, Ford Motor Company (NYSE:F) can benefit from rising prices which can be passed on to consumers with its top-of-the-line vehicles.
On March 14, Ford Motor Company (NYSE:F) announced that it will be offering a new generation of seven, all-electric, fully-connected passenger vehicles and vans in Europe by 2024. Ford Motor Company (NYSE:F) expects its annual sales of EVs in Europe to exceed 600,000 units by 2026 and aims to deliver a 6% return on sales in Europe in 2023.
According to Insider Monkey’s database, 53 hedge funds were bullish on Ford Motor Company (NYSE:F) by the end of the fourth quarter of 2021. The total stakes of these funds came to $1.7 billion, up from $1.64 billion in the preceding quarter with 51 positions. The hedge fund sentiment for the stock is positive, and as of March 31, 2022, Ford Motor Company (NYSE:F) has gained 19.42% over the past six months.
As of March 23, 2022, D E Shaw is the dominating shareholder in Ford Motor Company (NYSE:F), having stakes of more than $590 million in the automaker. The investment covers 0.48% of the fund’s 13F portfolio.
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Disclosure. None. 10 Best Cyclical Stocks For Inflation is originally published on Insider Monkey.
