In this article, we discuss the top 10 cyclical stocks to buy now. If you want to skip our detailed analysis of these stocks, go directly to the Top 5 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. (NYSE:PII) 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. (NYSE:PII), see a surge in demand.
Polaris Inc. (NYSE:PII) 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. (NYSE:PII) 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. (NYSE:PII) with 1 million shares worth more than $124 million. Of the 867 funds tracked by Insider Monkey, 15 held stakes in Polaris Inc. (NYSE:PII) at the end of September. The combined worth of these stakes was over $287 million.
Just like The Walt Disney Company (NYSE:DIS), Exxon Mobil Corporation (NYSE:XOM), and The TJX Companies, Inc. (NYSE:TJX), Polaris Inc. (NYSE:PII) 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. (NYSE:QSR) 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. (NYSE:QSR) lift loyalty memberships.
With sales trends improving as Restaurant Brands International Inc. (NYSE:QSR) 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. (NYSE:QSR) 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. (NYSE:QSR) 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. (NYSE:QSR) 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. (NYSE:GIS) 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. (NYSE:GIS) to outperform the S&P 500 in the coming months based on an improving balance sheet and robust free cash flows.
General Mills, Inc. (NYSE:GIS) 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. (NYSE:GIS) 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. (NYSE:GIS) 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. (NYSE:GIS) 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. (NYSE:LUV) 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. (NYSE:LUV) as the company offers higher margins despite low overall fares. Barclays analyst Brandon Oglenski has an Overweight rating on Southwest Airlines Co. (NYSE:LUV) 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. (NYSE:LUV) 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. (NYSE:LUV) worth $926 million.
In its Q1 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Southwest Airlines Co. (NYSE:LUV) 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. (NYSE:CAT) 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. (NYSE:CAT).
Bernstein analyst Chad Dillard recently upgraded Caterpillar Inc. (NYSE:CAT) stock to Outperform from Market Perform with a price target of $240. The analyst noted that Caterpillar Inc. (NYSE:CAT) 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 (NYSE:DIS), Exxon Mobil Corporation (NYSE:XOM), and The TJX Companies, Inc. (NYSE:TJX), Caterpillar Inc. (NYSE:CAT) 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. (NYSE:CAT) 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.”
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Disclosure. None. Top Cyclical Stocks To Buy Now is originally published on Insider Monkey.
