In this article, we discuss the top 5 cyclical stocks to buy now. If you want to read our detailed analysis of these stocks, go directly to the Top 10 Cyclical Stocks To Buy Now.
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 (NASDAQ:COST) 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 (NASDAQ:COST), 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 (NASDAQ:COST) 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. (NYSE: TJX) 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. (NYSE: TJX) 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. (NYSE: TJX) 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. (NYSE: TJX).
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 (NYSE:XOM) 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 (NYSE:XOM) 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 (NYSE:XOM) is heavily discounted as well.
Hedge funds have been loading up on Exxon Mobil Corporation (NYSE:XOM) 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 (NYSE:XOM), 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 (NYSE:XOM) 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 (NYSE:GM) shares are up 37% since January as the firm embarks on an ambitious plan to double revenues by 2030.
General Motors Company (NYSE:GM) has also enjoyed positive attention from hedge funds this year. Chicago-based investment firm Harris Associates is a leading shareholder in General Motors Company (NYSE:GM) 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 (NYSE:GM). 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 (NYSE:DIS) 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 (NYSE:DIS). Bank of America analyst Jessica Reif Ehrlich recently reiterated an Overweight rating on The Walt Disney Company (NYSE:DIS) 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 (NYSE:DIS) 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 (NYSE:DIS) 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.
