12 Undervalued Cyclical Stocks for 2021

Published on April 29, 2021 at 10:29 am by Usman Kabir in Hedge Funds, News

In this article we will take a look at 12 undervalued cyclical stocks for 2021. You can skip our comprehensive analysis of these companies and go directly to the 5 Undervalued Cyclical Stocks for 2021.

Businesses that rise and fall with the economic cycle have always baffled investors. These cyclical stocks tend to perform very well during an economic boom but register spectacular losses during recessions. Some industries that spring to mind based on this trend are the entertainment, automobile, construction, and transportation sectors. They are also sometimes referred to as consumer discretionary stocks because the companies comprising them sell items that are not essential to the everyday life of an individual.

During the past twelve months, the Consumer Discretionary Select Sector SPDR Fund (NYSE: XLY) – made up of firms in cyclical sectors like retail, hotels, restaurants, and leisure – has performed better than the wider market, giving investors a total return of 59.5% compared to the 52.8% offered by the Russell 1000. Most of the growth in cyclical stocks came after the announcement of the successful clinical trials of the COVID-19 vaccine towards the end of last year. As the economy slowly reopens in 2021, these stocks are expected to soar even further.

What Are Undervalued Cyclical Stocks?

Delta Air Lines, Inc. (NYSE: DAL), an airline carrier based in the US, took a huge hit in 2020 as international travel ground to a halt. However, a travel boom is in the offing with the rollout of the coronavirus vaccine. Delta Air Lines, Inc. (NYSE: DAL) stands to benefit immediately from the trend. It has ordered new aircraft as bookings improve – the airline says leisure bookings have recovered to about 85% of the level seen in 2019 – and airline executives have affirmed that Delta could break even as early as June after posting losses of $1.2 in the first quarter of 2021.

Not all cyclical companies see revenues decline during tough times. Walmart Inc. (NYSE: WMT), an Arkansas-based retail chain, actually registered an increase in earnings during the COVID-19 pandemic. One secret to the resilience of Walmart Inc. (NYSE: WMT), the largest retail brand in the US in terms of sales, during the pandemic was the pivot to digital: online sales increased 69% for the fourth quarter of 2020. The firm also plans to invest $14 billion this year in distribution networks alone to establish itself further in the retail sector.

The TJX Companies, Inc. (NYSE: TJX), another retail brand based in the United States, saw share price fall to as low as $42 in the first half of 2020, but has since recovered and even beaten pre-pandemic highs as the vaccine rollout enables a return to normality and people splash money on retail goods. A survey conducted by management consultancy McKinsey indicates that more than 50% of US consumers are likely to spend extra money to treat themselves as lockdown eases. The TJX Companies, Inc. will benefit from this trend.

It is not only retail brands whose fortunes are tied to the economic conditions. The manufacturing and construction sector is also cyclical. Haverty Furniture Companies, Inc. (NYSE: HVT), a furniture brand, posted a 31% increase in sales in the first quarter of 2021 compared to the same period last year. The company is now working to hire staff amid a growth in business. Haverty Furniture Companies, Inc. (NYSE: HVT) closed stories and halted deliveries through most of 2020 due to the pandemic.

A similar story can be followed in the construction industry. Lumber Liquidators Holdings, Inc. (NYSE: LL), a firm that offered floor-related services using imported Chinese material, suffered huge setbacks at the onset of the pandemic with share price falling to below $7 in April 2020. The company has rebounded since and is expected to be a top beneficiary of a government plan to help American manufacturers compete with Chinese firms. Earlier this month, Lumber Liquidators Holdings, Inc. posted a second straight quarter of double digit growth.

It is very difficult to predict economic cycles with enough precision to make healthy gains from cyclical stocks. The COVID-19 pandemic and the slow reopening of the economy has made it even harder to identify undervalued cyclical stocks that will offer handsome returns in the coming months. However, the disruption of the stock market by overvalued technology stocks seems to be occupying the attention of most financial advisors and this is a good chance to place high-risk, high-reward bets on undervalued cyclicals in the first half of 2021.

Investors should still be cautious about the uncertainty in the stock market due to the overall economic conditions. The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.

best Undervalued Cyclical Stocks for 2021

Photo by Austin Distel on Unsplash

With this context in mind, here is our list of 12 undervalued cyclical stocks for 2021.

Undervalued Cyclical Stocks for 2021

12. The Dixie Group, Inc. (NASDAQ: DXYN)

Number of Hedge Fund Holders: 4

The Dixie Group, Inc. (NASDAQ: DXYN) is a Georgia-based firm that makes and sells luxury soft floor covering carpets and rugs. The company also manufactures engineered wood products. Two brands associated with the group, Masland Residential and Dixie Home, provide products like residential carpets and vinyl flooring products to retailers, furniture stores, interior designers, and luxury home builders. The company was founded in 1920 and is ranked twelfth on our list of 12 undervalued cyclical stocks for 2021.

In November 2020, the share price of The Dixie Group, Inc. (NASDAQ: DXYN) jumped more than 24% after it reported a profit in the third quarter of the year. During the period, sales for the company grew 41% from the prior quarter and stood at $85.92 million. The firm said at the time that commercial product revenue was down 41% due to COVID-19 but residential product revenue had increased by 3%.

At the end of the fourth quarter of 2020, 4 hedge funds in the database of Insider Monkey held stakes worth $5 million in the firm, up from 2 in the preceding quarter worth $1.2 million.

11. Delta Air Lines, Inc. (NYSE: DAL)

Number of Hedge Fund Holders: 58

Delta Air Lines, Inc. (NYSE: DAL) is a Georgia-based air transportation service. It is one of the largest airlines in the United States and was founded in 1924. It is placed eleventh on our list of 12 undervalued cyclical stocks for 2021. The firm provides air transportation, cargo, as well as aircraft maintenance, repair, and overhaul services. Delta Air operates more than 1,100 aircraft and flies to hundreds of international destinations. The company also offers aircraft charter services to select customers.

On April 23. Delta Air Lines, Inc. (NYSE: DAL) announced that it had agreed to buy 25 more Airbus 321 aircraft in anticipation of a boom in business as international and domestic travel resumes after the pandemic. The new additions would bring the total number of such planes in the Delta fleet to 125.

Out of the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Citadel Investment Group is a leading shareholder in the firm with 5.3 million shares worth more than $215 million.

In one of their investor letters, Miller Value Partners highlighted a few stocks and Delta Air Lines Inc. (NYSE:DAL) is one of them. Here is what Miller Value Partners’ said:

“Delta Air Lines Inc. (DAL) declined -1.38% over the period after the initial hit to the stock in 1Q following the outbreak of the COVID-19 pandemic. The company reported 1Q results with EPS of -$0.51, in-line with consensus. The company guided for June revenue to be down 90% YoY and announced another $1B cut to capital expenditures (CAPEX) for a total cut of $3B so far this year. The company ended the quarter with $6B in liquidity and they expect to end the June quarter with $10B in liquidity. Delta held its annual shareholders’ meeting where it noted that it expects to finish the 2nd quarter with over $15B in liquidity with a daily cash burn of $30M getting to breakeven by the end of the year.”

10. Fuwei Films (Holdings) Co., Ltd. (NASDAQ: FFHL)

Number of Hedge Fund Holders: 1

Fuwei Films (Holdings) Co., Ltd. (NASDAQ: FFHL) is a China-based company that makes and sells biaxially oriented polyethylene-terephthalate films. The products marketed by the firm are used in a variety of things like circuit boards production, nameplate, crafts etching, as well as packaging for cigarettes and alcohol; and printing items. Fuwei has a thriving export business that caters to clients in Europe and North America. The firm was founded in 2003 and is ranked tenth on our list of 12 undervalued cyclical stocks for 2021.

Late last year, Fuwei Films (Holdings) Co., Ltd. (NASDAQ: FFHL) announced that it was selling its Dornier production line for $21 million. On April 22, the company posted a quarterly revenue of $13 million, up almost 6% compared to the previous year. Fuwei is expected to benefit from an increase in demand for goods as the vaccine rollout boosts the retail sector.

At the end of the fourth quarter of 2020, 1 hedge fund in the database of Insider Monkey held stakes worth $3.4 million in the firm, the same as in the preceding quarter worth $1 million.

9. TPI Composites, Inc. (NASDAQ: TPIC)

Number of Hedge Fund Holders: 27

TPI Composites, Inc. (NASDAQ: TPIC) is an Arizona-based firm that makes and sells wind blades and other related equipment. It was founded in 1968 and is placed ninth on our list of 12 undervalued cyclical stocks for 2021. The firm also offers products that are used in the transportation industry; field service inspection and repair services. It has operations in the US, Mexico, India, as well as the Middle East and Europe.

On April 23, TPI Composites, Inc. (NASDAQ: TPIC) was picked as one of the top picks for the year by investment bank Morgan Stanley after President Biden held a summit of world leaders on climate change and reiterated America’s leading role in this regard. On April 20, investment advisory Evercore had also rated TPI positively for the same reasons.

Out of the hedge funds being tracked by Insider Monkey, London-based investment firm Greenvale Capital is a leading shareholder in the firm with 1.1 million shares worth more than $62 billion.

In their Q4 2020 investor letter, Wasatch Micro Cap Value Fund highlighted a few stocks and TPI Composites Inc. (NASDAQ:TPIC) is one of them. Here is what the fund said:

“TPI Composites, Inc. (TPIC) was also a large contributor. Occasionally, we’re asked how our holdings measure up to the priorities of the Democratic Party. In general, we believe a strong company will thrive regardless of which political party is in power. But it’s possible some of our holdings will align particularly well with the incoming Democratic agenda. TPI Composites is a good example of a company that’s well-positioned for green-energy initiatives. The company designs and manufactures composite wind blades for wind energy. The stock was up strongly after TPI announced third-quarter net sales had increased 23.5% compared to the year-ago period. We believe some of this increase was due to the resumption of business that had been postponed during the height of the Covid anxiety. We’d like to find more alternative-energy companies to invest in, but it’s often difficult to uncover companies in this segment that meet our valuation and business-quality standards.”

8. BBQ Holdings, Inc. (NASDAQ: BBQ)

Number of Hedge Fund Holders: 4

BBQ Holdings, Inc. (NASDAQ: BBQ) is a Wisconsin-based franchise of restaurants that serve pork ribs, chicken, beef brisket, along with several flavors of barbecue sauce. The restaurants are mostly located in the US Midwest and the first branch was opened in 1994. The company is eighth on our list of 12 undervalued cyclical stocks for 2021. There are some units of the company outside the US too, like in Canada and the United Arab Emirates. The firm operates close to 150 restaurants under the brand name.

BBQ Holdings, Inc. (NASDAQ: BBQ) was earlier this month identified as one of the restaurant stocks with the biggest year-to-date returns by investment firm Advisor Shares. On April 20, the company said that it estimated revenues of more than $150 million in 2021, a significant boost from the $121 million posted in the previous year.

At the end of the fourth quarter of 2020, 4 hedge funds in the database of Insider Monkey held stakes worth $18 million in the firm, the same as in the preceding quarter worth $12 million.

7. Cannae Holdings, Inc. (NYSE: CNNE)

Number of Hedge Fund Holders: 34

Cannae Holdings, Inc. (NYSE: CNNE) is a Las Vegas-based holding firm with interests in the restaurants, technology, healthcare, and financial services sectors. The holding firm primarily manages and operates several different firms and investments, in addition to making majority and minority equity portfolio investments in businesses. It was founded in 2014 and is ranked seventh on our list of 12 undervalued cyclical stocks for 2021.

Cannae Holdings, Inc. (NYSE: CNNE) announced in early March that it would invest $50 million in the merger of QOMPLX and Tailwind Acquisition. In the same month, the firm said it was initiating a 10 million share buyback program that could reduce the total outstanding shares in the firm by over 11% over a period of three years.

Out of the hedge funds being tracked by Insider Monkey, New York-based firm Nitorum Capital is a leading shareholder in the firm with 3.7 million shares worth more than $164 million.

6. XpresSpa Group, Inc. (NASDAQ: XSPA)

Number of Hedge Fund Holders: 6

XpresSpa Group, Inc. (NASDAQ: XSPA) is a New York-based health services company that primarily offers spa services at several different airports. At outlets on airports, the firm offers massage, nail and skin care, as well as travel and retail products. The health and wellness centres of the firm also provide COVID-19 testing and other medical diagnostic testing services. The firm runs 45 locations in 23 airports globally. It is placed sixth on our list of 12 undervalued cyclical stocks for 2021.

XpresSpa Group, Inc. has a market cap of more than $150 million and posted annual revenue of $8.3 million in 2020, down from more than $47 million in 2019. However, as the pandemic subsides and people start to travel again, the firm is expected to gain back in the niche market it otherwise dominates.

At the end of the fourth quarter of 2020, 6 hedge funds in the database of Insider Monkey held stakes worth $4.6 million in the firm, up from 3 in the preceding quarter worth $2.5 million.

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