In this article, we discuss the top 10 cyclical stocks to buy now.
The spread of the Omicron variant of COVID-19 in recent weeks has slowed an otherwise booming economic recovery from the pandemic. Even though inflation concerns have also played their part in adding to the overall uncertainty around the market, analysts still expect advanced economies to collectively grow at a rate of 4.4% in 2022, down from 5.4% in 2021, but ahead of the 3.2% contraction in 2020. Companies that are vulnerable to recessions and economic slowdowns, often termed cyclical stocks, are witnessing heavy trade volumes.
Investors that are eager to profit from this trade should check out some of the top cyclical stocks to buy now that include The Walt Disney Company (NYSE:DIS), Exxon Mobil Corporation (NYSE:XOM), and The TJX Companies, Inc. (NYSE:TJX), among others discussed in detail below. Prevailing conditions such as government stimulus programs and low interest rates will change in the coming months, leading to increased interest towards these cyclical plays as growth stocks undergo a period of correction.
Our Methodology
The fortunes of cyclical stocks are closely tied to the performance of the overall economy. For example, these stocks tend to perform well during periods of prosperity but have historically poor records in recessions. The firms listed below were selected with a focus on these type of stocks, generally belonging to industries like automotive, construction, heavy equipment, and airlines. A careful assessment of business fundamentals and analyst ratings for each firm was also carried out to provide readers with some context for their investment choices.
Hedge fund sentiment was included as a classifier as well. The hedge fund sentiment around each stock was calculated using the data of 867 hedge funds tracked by Insider Monkey.
Top Cyclical Stocks To Buy Now
10. Polaris Inc. (NYSE:PII)
Number of Hedge Fund Holders: 15
Polaris Inc. (NYSE:PII) makes and sells powersport vehicles. The stock has gained in recent weeks on the back of a survey by the RV Industry Association which reveals that nearly 72 million Americans plan on taking an RV-related trip in 2022, up from 61 million a year ago, indicating an increase in demand for the purchase or rent of RVs. Although supply chain problems have prevented Polaris Inc. from fully taking advantage of the post-pandemic recovery, the upcoming holiday season could more than make up for the issues as snowmobiles, an important product of Polaris Inc., see a surge in demand.
Polaris Inc. also offers investors a compelling return profile and a solid dividend history. It has registered 25 consecutive years of dividend growth. The firm is expanding partnerships to improve services. In early December, Polaris Inc. announced that it had teamed up with Qmerit to provide home charging installation solutions for customers.
Hedge funds have also noticed the positive catalysts around the firm. Arrowstreet Capital, a Boston-based investment firm, is a leading shareholder in Polaris Inc. with 1 million shares worth more than $124 million. Of the 867 funds tracked by Insider Monkey, 15 held stakes in Polaris Inc. at the end of September. The combined worth of these stakes was over $287 million.
Just like The Walt Disney Company, Exxon Mobil Corporation, and The TJX Companies, Inc., Polaris Inc. is one of the stocks attracting the attention of elite investors.
9. Restaurant Brands International Inc. (NYSE:QSR)
Number of Hedge Fund Holders: 22
Restaurant Brands International Inc. (NYSE:QSR) owns and runs the Burger King and Tim Hortons brands. The company, flush from the reopening of the economy, has been exploring blockbuster acquisitions to expand business. As part of this plan, Restaurant Brands International Inc. recently held talks to purchase fast food giant Subway. The popular sandwich franchise is valued at around $10 billion. A partnership with pop star Justin Bieber has also helped Restaurant Brands International Inc. lift loyalty memberships.
With sales trends improving as Restaurant Brands International Inc. navigates labor shortages, Evercore ISI recently upgraded the stock to Outperform from In Line and raised the price target to $75 from $72. Analyst David Palmer highlighted the growth drivers for Restaurant Brands International Inc. were offsetting the underperformance of the Burger King brand in the US.
Hedge fund sentiment around the firm makes for bullish reading as well. Latest data shows that 22 hedge funds in the Insider Monkey database were long on Restaurant Brands International Inc. at the end of the third quarter of 2021 with stakes worth $1.8 billion.
In its Q4 2020 investor letter, Pershing Square Holdings Ltd, an asset management firm, highlighted a few stocks and Restaurant Brands International Inc. was one of them. Here is what the fund said:
“QSR’s franchised business model is a high-quality, capital-light, growing annuity that generates high-margin brand royalty fees from three leading brands: Burger King, Tim Hortons and Popeyes. The company nimbly navigated difficult market conditions in 2020 by assisting franchisees, while maintaining its long-term growth potential.
As the COVID-19 pandemic began, management undertook a series of steps to secure and strengthen the business. The company quickly bolstered safety procedures and shifted marketing spend to highlight the off -premise options available to customers, while supporting its franchisees with fee/cap ex deferrals and liquidity programs. Throughout the year, the company accelerated its digital investments by expanding its delivery footprint, modernizing its drive-thru experience, increasing mobile ordering adoption, and improving its loyalty programs.
While the company’s sales were negatively impacted by the pandemic, comparable sales have already recovered or are well on their way to recovery. Burger King U.S. returned to growth in January; Tim Hortons improved to a high-single-digit decline in Canada during the fourth quarter, and Popeyes U.S. grew 16% in 2020. To accelerate the recovery at Tim Hortons in Canada, the company has committed additional funds to bolster its advertising, and support continued enhancements to its Tim’s Rewards program.
We continue to believe each of Restaurant Brands’ concepts will emerge stronger from this crisis as their business models are competitively advantaged in a socially distant and more budget-conscious consumption environment, and as the company continues to invest in drive-thru, delivery, and digital. We believe QSR’s long-term unit growth opportunity is still intact, and we expect unit growth to return to its mid-single-digit growth rate this year. As investors begin to see the results of these efforts, and underlying sales trends at each of its brands continue to improve, QSR’s share price should more accurately reflect our view of its business fundamentals.”
8. General Mills, Inc. (NYSE:GIS)
Number of Hedge Fund Holders: 32
General Mills, Inc. (NYSE:GIS) markets branded consumer foods. Although inflation headwinds have affected overall performance in the past few months, the mini-crisis has also shown investors the pricing power of the company. As General Mills, Inc. expands into the pet food sector, an important and growing source of revenue, the future prospects of the stock look exceedingly bright. Analysts expect General Mills, Inc. to outperform the S&P 500 in the coming months based on an improving balance sheet and robust free cash flows.
General Mills, Inc. has a recession-resistant business model. Not only has the firm passed on inflation-related costs to customers but it has also cut down on operational expenses by other means, including supply chain optimization, downsizing, working capital improvements, and reduction of advertisement spend. The sale and free cash flow for General Mills, Inc. continues to improve despite these measures.
New York-based firm Renaissance Technologies, one of the most famous funds on Wall Street, is a leading shareholder in General Mills, Inc. with 4.2 million shares worth more than $255 million. In addition to Renaissance, 31 other funds also held stakes in the firm at the end of September.
In its Q3 2021 investor letter, Oakmark Funds, an asset management firm, highlighted a few stocks and General Mills, Inc. was one of them. Here is what the fund said:
“In the 1970s, blackout rules prevented televising NFL home games that weren’t sold out. It was always uncertain whether or not the Minnesota Vikings’ games would be televised. I remember how excited I’d be each week hearing that General Mills had purchased the remaining tickets, allowing the game to be on TV. Some said General Mills did this for its stakeholders—its employees and community—as opposed to maximizing profits for its shareholders. I believe stakeholders and shareholders both benefitted.
Consider the long-term benefits of General Mills being the hero that let us watch those games. It made employees proud of their employer and maybe helped with talent acquisition. The thousands of disadvantaged kids who got to attend NFL games were perhaps more likely to become General Mills customers or employees. And across the state, maybe we were all more likely to buy Betty Crocker cake mix instead of Duncan Hines. While the tickets were purchased in the name of being a good corporate citizen, I believe it was the most effective marketing ever done by General Mills and clearly benefitted the company’s shareholders.
Would Friedman argue against this spending because it reduced profits? Absolutely not. His writing from more than 40 years ago sounds eerily timely: “In the present climate of opinion, with its widespread aversion to ‘capitalism,’ ‘profits,’ the ‘soulless corporation’ and so on, this is one way for a corporation to generate goodwill as a by-product of expenditures that are entirely justified in its own self-interest.
General Mills accepted lower short-term profits in its pursuit of higher long-term value. And the stakeholders also benefitted. In The Heart of Capitalism, Joly states that “shareholder or stakeholder” tradeoffs are artificial because an “and” solution often exists. “We maximize performance not by choosing between stakeholders, but by embracing all of them. We choose employees and customers and shareholders and the community.” Joly cites examples from his time at Best Buy, including reducing its carbon footprint by installing LED lights throughout the stores. “This helps the environment and helped us save money on our energy consumption. Again, not a zero-sum game.”
7. Southwest Airlines Co. (NYSE:LUV)
Number of Hedge Fund Holders: 39
Omicron worries have understandably hit airline stocks like Southwest Airlines Co. (NYSE:LUV) in recent weeks as investors brace for more lockdowns. However, data from the Transportation Security Administration shows that airline traffic has not been adversely affected by the rise of the new variant. Analysts expect Southwest Airlines Co. to rally in 2022 as travel activity jumps back to pre-virus levels. US Global Jets ETF, the aviation exchange traded fund that comprises airline operators and manufacturers, also soared in December.
Investors are flocking to Southwest Airlines Co. as the company offers higher margins despite low overall fares. Barclays analyst Brandon Oglenski has an Overweight rating on Southwest Airlines Co. stock with a price target of $65. In an investor note, the analyst noted that cost inflation was driving fear in relation to the shares despite bullish revenue overtones.
Of the 867 hedge funds tracked by Insider Monkey, 39 funds with stakes worth $729 million were long Southwest Airlines Co. at the end of September. One of the leading shareholders is Renaissance Technologies with 2 million shares worth more than $103 million. At the end of the second quarter, 49 funds had stakes in Southwest Airlines Co. worth $926 million.
In its Q1 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Southwest Airlines Co. was one of them. Here is what the fund said:
“One of our goals as we constantly monitor the portfolio is to see if we can better deploy capital by lowering the probability of being wrong. This motivation drove our swap of Delta Airlines into Southwest Airlines during the quarter. We expect a huge rebound in airline traffic as COVID-19 concerns abate, but we are much more comfortable that it will be led by leisure travel. Conversely, we are more uncertain of the ultimate level and timing of business travel demand. Southwest, with its simple fare strategy and high leisure travel exposure, is better positioned to capture the ongoing traffic rebound without having to answer the business travel demand question on which Delta is more dependent. As a result, we expect Southwest to play serious offense as it gains share in the rebounding travel market and can fully leverage the massive pent-up demand for travel that we expect. In addition, the U.S. lead in vaccination over Europe favors Southwest over Delta, given the domestic focus of Southwest. COVID-19 has changed many things, but humans by their very nature like to move, and many of them will do it on Southwest.”
6. Caterpillar Inc. (NYSE:CAT)
Number of Hedge Fund Holders: 46
One of the top reasons to invest in Caterpillar Inc. (NYSE:CAT) stock is the trust shown in the company by Washington-based Bill & Melinda Gates Foundation Trust, the hedge fund founded by Bill Gates that has a history of backing businesses with long-term catalysts.
At the end of the third quarter of 2021, the fund was a leading shareholder in Caterpillar Inc. with 9.6 million shares worth more than $1.8 billion. The stock has also rallied in recent weeks after the successful passage of the Biden Infrastructure Plan that will increase government spending on construction machinery, directly benefiting Caterpillar Inc..
Bernstein analyst Chad Dillard recently upgraded Caterpillar Inc. stock to Outperform from Market Perform with a price target of $240. The analyst noted that Caterpillar Inc. was expected to be one of the biggest beneficiaries of a looser monetary policy in China in the coming months and that the concerns about the end of the machinery cycle in 2022 were “overdone”.
In addition to The Walt Disney Company, Exxon Mobil Corporation, and The TJX Companies, Inc., Caterpillar Inc. is one of the stocks that hedge funds are buying.
In its Q2 2021 investor letter, Oakmark Funds, an asset management firm, highlighted a few stocks and Caterpillar Inc. was one of them. Here is what the fund said:
“Having followed the company closely for north of a decade, Caterpillar is a name we know well. For much of its history, the operating efficiency of the company left much to be desired, but its underlying competitive position was rarely in doubt. A series of actions over the past decade (e.g., LEAN implementation, improved service mix, optimized manufacturing footprint) helped to narrow the gap between Caterpillar’s potential and its realized results, driving material margin expansion and strong share price performance. In our view, the company remains among the highest quality industrials in the market, but its underlying business is cyclical, which can translate to large swings in both performance and investor sentiment over short time periods. Our ability to focus on the long-term, sustainable earnings power of a business (rather than getting distracted by near-term fluctuations) is our most significant edge when investing in cyclical businesses. Due to the inherent volatility in Caterpillar’s end markets and operating performance, we suspect we’ll have a future opportunity to own this high-quality business at a more attractive price once the cycle turns and today’s enthusiasm wears off.”
5. Costco Wholesale Corporation (NASDAQ:COST)
Number of Hedge Fund Holders: 55
The retail sector has dipped in recent weeks after a weaker-than-expected holiday sales report and concerns around the spread of the Omicron variant. However, even in the bear market, Costco Wholesale Corporation (NASDAQ:COST), one of the retail giants in the US, has managed to defy the near-term pressures by registering small gains through the period. The performance indicates the resilient nature of the stock and highlights a business model that tends to outperform the market when there is a slump.
Costco Wholesale Corporation recently beat market expectations on earnings per share and revenue for the first fiscal quarter by $0.12 and $610 million respectively. At the end of the third quarter of 2021, 55 hedge funds in the database of Insider Monkey held stakes worth $4.39 billion in Costco Wholesale Corporation, up from 54 in the preceding quarter worth $4.32 billion.
In its Q1 2021 investor letter, Ensemble Capital, an asset management firm, highlighted a few stocks and Costco Wholesale Corporation was one of them. Here is what the fund said:
“We saw these dynamics at play in the Fund. Some of the worst-performing stocks this quarter were among our best performers in Q1 2020. Another example was the market’s reaction to Costco Wholesale (1.5% weight in the Fund) during the quarter. From December 31, 2020 to March 8th, Costco shares declined 17% and dropped below their pre-pandemic high. The common rationale offered by sell-side analysts was that Costco would face difficult one-year “comps” (i.e. same-store sales, which compare sales from stores open for at least a year). Because so many consumers rushed to Costco ahead of shelter-in-place and subsequent quarantines, it will be harder for Costco to meaningfully beat those results when compared year-over-year. That may indeed be true, but we struggle to understand how Costco could be “less valuable” than it was a year earlier when it concurrently increased its membership base by over 7%, or 3.9 million members. With membership renewal rates around 90%, the vast majority of the new customers Costco brought in last year will be around for years to come.
Analysts also complained about Costco raising its already industry-leading minimum wage to $16/hour, with an average “effective” pay of $23-$24/hour when you include overtime and bonuses. Costco paying its employees “too much” has been a common gripe of Wall Street analysts for at least two decades. While the extra pay does indeed impact short-term profit margins, it also serves to make Costco more durable, as its flywheel (i.e. a virtuous value cycle) starts with happy employees. A 20-year chart of Costco stock price is evidence that this strategy works and we’re confident that it will continue to work.”
4. The TJX Companies, Inc. (NYSE:TJX)
Number of Hedge Fund Holders: 63
The TJX Companies, Inc. is an off-price apparel and home fashions retailer. Investment advisory Jefferies recently named the company as one of the highest conviction recommendations out of the retail sector for 2022. The advisory has a Buy rating on The TJX Companies, Inc. stock with a price target of $90 and expects it to do well in the coming months based on “market-leading positioning, diversified offering and opportunity to drive sales and margin via pricing initiatives”.
Hedge fund sentiment around the company is positive as well. At the end of September, 63 hedge funds in the database of Insider Monkey were bullish on The TJX Companies, Inc. with stakes worth $2.33 billion. This compared favorably to the end of June when just 56 funds had stakes in The TJX Companies, Inc..
Giverny Capital, in their Q1 2021 investor letter, mentioned The TJX Companies, Inc. (NYSE:TJX). Here is what the fund said:
“We’re pretty happy with the current portfolio and so were not very active during the quarter. Our only consequential decision in the first quarter was to exit the off-price retailer The TJX Companies in January. My prior firm owned TJX for most of the past 20 years and enjoyed appreciation on the order of 20 times the original purchase price.
TJX is a great company, but the growth rate has slowed in recent years and the operating margin has been under pressure, mainly from rising wages for store workers. When the pandemic hit, I bought the stock for GCAM in the belief that if the US fell into a prolonged recession, TJX would be a winner because of its extreme value position.
The US didn’t fall into a prolonged recession. Rather, many consumers are flush with cash thanks to government relief programs. But brick-and-mortar stores are losing out to online competitors for reasons of safety and convenience. TJX has fared much better than most of its competitors during this time and should continue to do so, thanks to its model of buying inventory close to need and reacting to what is happening in the marketplace rather than trying to create hot product. But the stock rose about 50% in the few months we owned it and that increase seemed to price in a complete recovery and more. We sold in early January.”
3. Exxon Mobil Corporation (NYSE:XOM)
Number of Hedge Fund Holders: 68
Exxon Mobil Corporation stock is up close to 50% year-to-date on the back of a boost to energy prices and an increase in demand as the post-pandemic recovery gathers pace. There are reports that Exxon Mobil Corporation plans to increase wages in 2022 by 3.6% across the board, half the rate of inflation, as it also doubles down on investments related to reduction of carbon emissions. The free cash flow and earnings growth of Exxon Mobil Corporation is heavily discounted as well.
Hedge funds have been loading up on Exxon Mobil Corporation stock over the past few months. Latest filings show that 68 hedge funds in the database of Insider Monkey held stakes worth $3.6 billion in Exxon Mobil Corporation, up from 65 in the preceding quarter worth $2.7 billion.
JPMorgan analyst Phil Gresh has an Overweight rating on the shares with a price target of $83. The analyst says the company is “turning a corner, with newfound discipline and good progress on reducing debt from peak levels”.
In its Q1 2021 investor letter, Harding Loevner highlighted a few stocks and Exxon Mobil Corporation was one of them. Here is what the fund said:
“We felt that our remaining energy holding, ExxonMobil, with its stronger balance sheet, was in a better position to ride out the cyclical slump in oil demand and even perhaps take advantage of it by investing counter-cyclically. While ExxonMobil does plan to increase capital expenditure, we’ve been disappointed in its regrettable failure to address ongoing emission trends, which reflects poorly on management’s foresight. As a result, we sold our ExxonMobil holdings.”
2. General Motors Company (NYSE:GM)
Number of Hedge Fund Holders: 77
On December 17, General Motors Company (NYSE:GM) announced that it had begun delivering the all-electric GMC Hummer and the BrightDrop EV600 light commercial vehicle. The announcement marked the beginning of a new era for the firm with a focus on EV manufacturing through the Ultium Platform that will lead to development of vehicles across brands and allow third-party licensing of EV technology. General Motors Company shares are up 37% since January as the firm embarks on an ambitious plan to double revenues by 2030.
General Motors Company has also enjoyed positive attention from hedge funds this year. Chicago-based investment firm Harris Associates is a leading shareholder in General Motors Company with 34 million shares worth more than $1.8 billion. The company is expanding into the cloud business as well as it pours nearly $35 billion into a transition towards technology and EVs.
Junto Investments, in its Q4 2020 investor letter, mentioned General Motors Company. Here is what the fund has to say about General Motors Company in its letter:
“General Motors was the biggest gainer. We managed to buy it at a screamingly cheap price in the middle of March. A lot of interesting news has emerged about GM recently, including the new electric product delivery system BrightDrop and GM Cruise’s team-up with Microsoft Azure to commercialize self-driving cars in 2021. GM’s intrinsic value is crystallizing and the company is worth a whole lot more than is still reflected in the market.”
1. The Walt Disney Company (NYSE:DIS)
Number of Hedge Fund Holders: 101
The Walt Disney Company is one of the most famous stocks among hedge funds and has been in that position for years. At the end of the third quarter of 2021, 101 hedge funds in the database of Insider Monkey held stakes worth $9.4 billion in The Walt Disney Company. Bank of America analyst Jessica Reif Ehrlich recently reiterated an Overweight rating on The Walt Disney Company stock with a price target of $191.
The target implies upside potential of 30% in the shares based on the prediction that The Walt Disney Company will likely to benefit from strong additions to Disney+ platform in the coming months and also gain from the recovery in the theme parks business.
In its Q4 2020 investor letter, Harding Loevner, an asset management firm, highlighted a few stocks and The Walt Disney Company was one of them. Here is what the fund said:
“One of the original constituents of the Nifty Fifty holds a place in our portfolio today. When we bought Disney three years ago, we wrote that “we view Disney theme parks in the US, Europe, and China as resistant to online substitution.” We did not reckon on a pandemic, which closed all of them, and sent all of usto our couches. Disney, however, wasready for us, brilliantly illustrating the importance of management foresight and change management. Or, as Louis Pasteur said, “chance favors the prepared mind.
A century after its founding in 1923, Disney is in the middle of a bold shift from its legacy media networks & entertainment model—with cable TV, theme parks, and theater films dominating its earnings—to a direct-to-consumer streaming media model. The keys to Disney’s transition: matchless storytelling, coupled with financial strength. The company reliably creates content that people all over the world are eager to consume. It also hastened spending on original content to attract subscribers to its new streaming platform. These factors have allowed Disney to weather the pandemic having expanded its direct engagement with customers. Such connections yield a rich harvest of insights used to customize offerings on a mass scale, reinforcing that engagement in a virtuous circle and thereby raising the lifetime value of each customer. Subscribers to Disney+ reached 86.8 million one year after launch, compared to the 60 – 90 million management projected to reach in 2024. To be sure, Netflix, Apple, and Amazon remain formidable competitors in new-era streaming entertainment (mind what we said about everyone standing up at once), but there’s fight left in this old dog.”
You can also take a peek at 10 Best Healthcare Dividend Stocks to Buy Now and 10 Dividend Stocks with Over 20 Years of Dividend Increases.
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This article is originally published at Insider Monkey.
