I bought Valero in both March and November of 2020, and wrote about those purchases on Seeking Alpha. Usually, when a stock comes off of a super-cycle as Valero has likely done, they have a bounce after a big price decline, then they fall farther, and usually form some sort of double bottom. Valero followed this pattern (though it was heavily influenced by COVID developments so it may have just been luck that it happened to do so). The main reason this is important is that I usually use the peak of the bounce and treat that at the new peak rather than the super-cyclical peak. Using this price, Valero has about 35% more upside until we reach pre-COVID levels. If we generously give ourselves three years to do that from here, plus we collect a 5% dividend yield each year, that gets us to my 50% return goal even though the stock is well above its lows.
- Cyclical stocks can be categorized as durables, nondurables, and services.
- Tech stocks tend to be among the hardest hit when fears rise about a potential recession ahead.
- When the economy is down, the prices of cyclical products and services also decrease, affecting the stock prices.
- Investing in non-cyclical stocks is considered to be safer than investing in cyclical stocks.
Low P/E multiples are good base indicators that the company is undervalued and can most likely be labelled as a value stock. The full list of 18 undervalued consumer cyclical stocks with moats can be found at the end of this article. As you can see, HollyFrontier sets up very similar to Valero, except HFC has a lower dividend with more potential price upside, and analysts do not expect HFC’s earnings to recover as quickly as Valero’s. I still think that over the medium-term there is a high probability the price will rise somewhere in between the pre COVID levels and the 2018 peak. That’s a very good risk/reward and still offers solid value in the current market.
Consumer Discretionary vs. Consumer Staple
This sector also includes businesses engaged in commodity exploration and processing. BorgWarner was a stock I successfully traded and wrote about on Seeking Alpha back in 2016 during the last down cycle. I had been avoiding auto stocks during the March sell-off because I didn’t know we would have such a huge fiscal response from the federal government.
Demand for these experiences tends to decline during a recession. However, it’s holding up in 2022 because people still want to enjoy these experiences after having to hold back during the early stages of the pandemic. Cyclical stocks tend to be for expensive durable goods, luxury, or leisure. Therefore, stocks in the automotive industry, consumer durables, airlines, luxury goods makers, and hospitality stocks would be prime examples. The stock can’t be called cheap at a price-to-sales ratio of nearly 12.
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this post may contain references to products from our partners. We are an independent, advertising-supported comparison service. Cyclical stocks can be categorized as durables, nondurables, and services. How volatile their price changes are depends on how quickly the economy is moving into or recovering from a recession.
My analysis focuses on the cyclical nature of individual companies and of markets in general. I’ve developed a unique approach to estimating the fair value of cyclical stocks, and that approach allows me to more accurately buy near the bottom of the cycle. Right now, most semiconductor stocks are fully valued and near all-time highs, but since they are in a secular uptrend and we are early in the economic cycle, they could have more upside.
How do you know when a stock is going to rise, and when it is going to fall? If there were a single, definitive answer, all investors would be billionaires. While all stocks are affected by the moves of the stock market itself, there are a host of other influences — from a company’s own fundamentals to the economy overall. Steel producer Nucor (NUE -0.09%) tends to be highly cyclical since demand for steel ebbs and flows with the economy. When the economy is expanding, companies use more steel to construct buildings, cars, and other industrial goods. However, demand for steel tends to decline during a recession.
Standard & Poors Sectors
Investing in non-cyclical stocks is considered to be safer than investing in cyclical stocks. During economic turndowns, non-cyclical companies won’t produce the losses that highly-cyclical companies do. But for the same reason, when the economy grows, non-cyclical stocks won’t surge in price either. Companies that deal with food, gas, and water are examples of those that have noncyclical stocks, such as Walmart. Adding noncyclical stocks to a portfolio can be a great strategy for investors as it helps hedge against losses sustained from cyclical companies during an economic slowdown.
Investment advisory services are only provided to investors who become Stash Clients pursuant to a written Advisory Agreement. Understanding the difference might help you understand how an investment may perform in a given economic climate. This article explores what cyclical and defensive stocks are, their pros and cons, and how to start investing in six simple steps. Given these differences, having a mix of cyclical and non-cyclical stocks in a long-term portfolio can be an appropriate hedging strategy. Owning cyclical stocks during expansionary periods can lead to massive returns.
What Is a Cyclical Stock?
However, these are still good examples of stocks that generally behave either cyclically or defensively. Below is a historical example that uses a chart showing the performance of a highly-cyclical company, the Ford Motor Co. (blue line), and a classic non-cyclical company, Florida Public Utilities Co. (yellow line). This chart clearly demonstrates how each company’s share price reacts to downturns in the economy.
You might devote a portion of your stock investments to cyclical stocks and balance potential risk by investing in defensive stocks as well. Cyclical stocks are those of companies whose sales ebb and flow with the economic cycle of recession and expansion. Cyclical businesses generally thrive during times of economic expansion, but they usually see steep declines in profits and sales during recessions and economic downturns.
Their fluctuations can mean losses for the unwitting investor. You can lose a significant amount of money if you are not careful. While not exactly timing the market, investing in cyclical stocks requires buying and selling in sync with the business cycle.
Microsoft routinely turns more than 40% of its sales into operating profit, for example. That key metric jumped a blazing 21% in the quarter that ended in late June. While we appreciate some of the concerns raised by the activist, we were against most of its suggestions, which we believed would be destructive to long-term shareholder value. Sweetgreen is one of the fastest growing restaurant chains in the U.S. and sits at the intersection of health and wellness, plant-based food consumption, digital adoption, and purpose-driven brands. As of the third quarter of 2021, the company operated 140 restaurants in 13 states, with the goal of being as ubiquitous as traditional fast food. Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams.
Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns. Meanwhile, with demand strong, EPR Properties has returned to growth mode in 2022. The REIT has started acquiring experiential real estate again, which should enable it to increase its funds from operations (a metric measuring a REIT’s cash flow) and its monthly dividend. Get this delivered to your inbox, and more info about our products and services. Investors will have trouble finding a more financially impressive business.
Below are the top five companies (by index weight) in the S&P Consumer Discretionary (Sector) index, as of December 31, 2021. Another challenging part of this strategy is that you’ll likely be buying when popular valuation metrics like the price/earnings (P/E) ratio appear high. For example, if a business earned $0.10 per share over the past twelve months and its stock sells for $10.00, the P/E ratio will look extremely high at 100. But if that same business is about to recover with the broader economy and will earn $1.00 per share in the next year or two, you may have quite the bargain on your hands. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional.
Top Cyclical Stocks List to Watch in 2020
The travel industry is cyclical as it relies heavily on consumer spending on vacations and travel. In good economic times, people are more likely to take holidays and take flights to go on these trips than in bad economic times, when people are more concerned about spending. It can be hard to predict how much a cyclical stock will rise or fall in value due to the nature of the economy and what’s going on in a particular sector at any time. A beta coefficient or value is given to a stock based on its sensitivity to changes in the market. This is calculated by comparing individual returns to those of the market as a whole. One particular segment, known as cyclical stocks, are particularly sensitive to cycles of the economy.
You can invest in shares of stock or funds through your brokerage. As you consider your selections, your brokerage may offer investment advice via a human advisor, a robo-advisor, or a combination to help you decide how to balance your portfolio. Once you know what to look for, you can research individual stocks that interest you.
Unfortunately for investors, we didn’t know the degree and effectiveness of what that response would be in March of 2020, so I think caution was (and still is) warranted in these hard-hit industries. There are three very important practical factors that I use to define stock cyclicality. Integrated into my definition and classification are manual trade important factors that serve as quality standards as well. These help keep me from making big mistakes while investing in cyclicals, which is important because lower quality cyclicals can generate very big losses, very quickly. The answer depends on your risk profile and investment goals, and only you can decide what’s right for you.
While some cyclical businesses see their profits decline or eliminated altogether, other businesses face even worse outcomes during recessions. Cyclical companies with heavy debt loads are sometimes forced into bankruptcy during economic downturns. The airline industry, for example, has suffered several bankruptcies in recent decades as slowdowns meant some businesses couldn’t meet their debt obligations. At times, cyclical stocks can actually be more volatile than the benchmark indexes. Stocks are considered cyclical if the prices correlate with these four phases.
This sector includes companies involved in construction and real estate development. In times of an economic downturn, businesses often reduce inventory levels, postpone purchases and delay expansions. The inverse is typically true for economic upturns whereby the construction sector expands. Albemarle is a material stock that has moderate earnings cyclicality, but high price cyclicality. I think the reason for this is that lithium is expected to be in a secular uptrend for the next several years due to the rising use of electric vehicles.
It’s important to keep in mind that I consider EOG one of the higher quality oil stocks and that most oil and energy stocks in the market do not meet my quality standards. Critics are looking at the market price of the stocks today and using that to judge whether a sell decision last February or March was wise or not. But if we look at the actual business results of Ryanair (which are better than many of the US airlines) they essentially will have had three full years with zero cumulative earnings. https://bigbostrade.com/ And if vaccines hadn’t been developed as fast as they were, it could have been five years with no earnings. Established businesses with limited long-term earnings growth that go three years-plus with no cumulative earnings (and increased debt and shareholder dilution in many cases) are not good investments. Carnival Cruise Line (CCL) has been my poster child for this dynamic, but it’s basically true for all cruise lines, airlines, or plane manufacturers, like Boeing (BA), as well.