Cyclical stocks are shares of companies whose performance is heavily dependent on business cycles and economic conditions. These stocks represent industries that produce non-essential, or discretionary, goods and services, such as automobiles, housing, entertainment, travel, and retail.

As the Federal Reserve lowers interest rates, it creates a favorable environment for investing in cyclical stocks. Lower interest rates reduce the cost of borrowing, which encourages both consumers and businesses to take out loans and spend more. This boost in consumer spending is particularly beneficial for companies that sell discretionary goods and services, such as those in the automotive, housing, travel, and retail sectors.

According to the latest report, released by the U.S. Bureau of Economic Analysis (BEA) on September 27, personal income in the US increased by $50.5 billion, or 0.2%, in August. This growth was driven by an increase in compensation, which was partially offset by a decrease in personal income receipts on assets. Disposable personal income (DPI), which is personal income less personal current taxes, also increased by $34.2 billion, or 0.2%. Additionally, personal consumption expenditures (PCE) rose by $47.2 billion, or 0.2%, with a $54.8 billion increase in spending for services and a $7.6 billion decrease in spending for goods.

Large Bank Sees Stabilizing Economy Boosting Cyclical Stocks

On October 14, CNBC reported that Morgan Stanley is optimistic about the stabilizing economy and its potential to boost cyclical stocks. According to equity strategist Michael Wilson, the recent rise in yields following optimistic economic data, including the latest wholesale inflation report, could indicate that the bond market is beginning to part with some of the growth concerns on the hope that the economy is on stable footing. He added that this trend provides greater confidence in cyclical stocks, which are positively correlated to upward moves in the 10-year Treasury yield. Wilson expects both rates and economic data to support cyclical stocks. The bank’s bullish call comes as the S&P 500 rose to a fresh record high, supported by better-than-expected results from a handful of companies that have reported third-quarter results.

Cyclical stocks offer significant opportunities for investors looking to capitalize on economic growth and favorable monetary policy. As the Federal Reserve continues to lower interest rates, the reduced borrowing costs will continue to stimulate consumer and business spending, driving demand for discretionary goods and services. With that in context let’s take a look at the 7 best consumer cyclical stocks to buy according to hedge funds.

Our Methodology

To compile our list of the 7 best consumer cyclical stocks to buy according to hedge funds, we used the Finviz and Yahoo stock screeners to find the largest consumer cyclical companies.  We then narrowed our choices to 7 stocks according to their hedge fund sentiment, which was taken from our database of 912 elite hedge funds as of Q2 of 2024. The list is sorted in ascending order of their hedge fund sentiment, as of the second quarter.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

7 Best Consumer Cyclical Stocks To Buy According to Hedge Funds

7. MercadoLibre, Inc. (NASDAQ:MELI)  

Number of Hedge Fund Investors: 84

MercadoLibre, Inc. (NASDAQ:MELI) is one of the largest e-commerce and fintech companies in Latin America, often dubbed the “Amazon of Latin America.” The company operates online marketplaces across several countries, including Argentina, Brazil, and Mexico. MercadoLibre, Inc. (NASDAQ:MELI) also has a strong fintech division, Mercado Pago, which offers payment solutions and digital wallets. The company’s logistics arm, Mercado Envios, provides seamless delivery services.

On August 1, MercadoLibre, Inc. (NASDAQ:MELI) reported strong results, exceeding market expectations, for the quarter ended June 30. The company’s revenue increased by 41.5% year-over-year to $5.07 billion, driven by a 19% and 29% year-over-year increase in unique buyers and items sold respectively. Brazil posted the fastest growth on both measures which led to GMV growth accelerating to 36% year over year. Mexico had a growth of 30% year over year and Argentina’s GMV growth improved to 252% year over year.

MercadoLibre, Inc.’s (NASDAQ:MELI) fintech segments also reported impressive growth in Brazilian and Mexican markets. The company’s fintech segment generated a revenue of $2.10 billion, compared to $1.64 billion for the same quarter in the previous year. The company’s Fintech Monthly Active users (MAU) surpassed 50 million for the first time, with growth of 37% YoY. Brazil delivered the highest MAU growth at 46% YoY. MercadoLibre, Inc. (NASDAQ:MELI) is the largest loan fintech in Mexico and is planning to apply for a banking license to expand its operations.

MercadoLibre, Inc. (NASDAQ:MELI) is forecasted to report 62.66% earnings growth for this year. Industry analysts are bullish on the company’s stock price and have a consensus Buy rating at a target price of $2,350.11, which implies a 12.68% increase from its current level.

6. Tesla, Inc. (NASDAQ:TSLA)  

Number of Hedge Fund Investors: 85

Tesla, Inc. (NASDAQ:TSLA) is the global leader in electric vehicle manufacturing and has disrupted the automotive industry with its electric cars. Tesla, Inc.’s (NASDAQ:TSLA) innovation also extends into robotics and autonomous driving technology with its Full Self-Driving (FSD) software.

On October 10, Tesla, Inc.’s (NASDAQ:TSLA) CEO Elon Musk revealed the company’s humanoid robot, Optimus, which is expected to cost around $10,000 to produce and will be priced at $20,000 for customers. One of the most significant advantages Tesla, Inc.(NASDAQ:TSLA) has in the humanoid robot market is its ability to leverage its existing technology and manufacturing capabilities to keep costs low. The company has already developed advanced AI and robotics technology for its electric vehicles, which can be easily transferred to Optimus. Additionally, the company’s large-scale manufacturing capabilities will enable the company to produce Optimus at a lower cost than its competitors.

According to a report by Markets and Markets, the humanoid robot market is valued at $2.03 billion in 2024 and is projected to grow to $13.25 billion by 2029, at a CAGR of 45.5%. Tesla, Inc. (NASDAQ:TSLA) is well-positioned to capture a significant share of the humanoid robot market. With its affordable pricing and advanced technology, Optimus is likely to disrupt various industries, including manufacturing, healthcare, and education.