While U.S. stock markets have soared to record highs this year, some of the cyclical stocks are still down sharply. These stocks tend to do well when the economy is in the expansion stage. However, cyclical stocks are among the worst performers in a recessionary environment like the present. What are the top cyclical stocks to play the sector rotation and the economic recovery story?
Top cyclical stocks
To be sure, there is a degree of cyclicity is almost all sectors. However, some sectors are more cyclical in nature than others. These include basic materials, industrials, financial services, real estate, consumer discretionary, and energy.
Industry Watch— Paul Ebeling (@Redroadmaster) October 2, 2020
Strong: Materials, Utilities, Industrials, RE, Energy
Weak: Energy, Consumer Staples, Information Technology
Moving the Market
Investors buying the dip in cyclical stocks
Positive stimulus commentary
Rotation out of the mega-caps
Top cyclical stocks 2020
Looking at the metals space, while some industrial metals—especially copper—have recouped their 2020 losses and are trading near multi year highs, U.S. steel prices are still languishing. Steel demand depends on end user demand. The construction and automotive sectors account for the bulk of steel demand. Now, both these sectors are also cyclical in nature.
Incidentally, U.S. steel stocks have underperformed in Trump’s presidency despite the administration imposing a 25 percent tariff on steel imports. However, as the economic activity gains pace, steel stocks like U.S. Steel Corporation, Cleveland-Cliffs, Nucor, and Steel Dynamics could see gains.
Steel market stocks like Russel Metals trending higher — US steel production down 34% YoY, up slightly in June. $RUS free cashflow of $79M in Q2 primarily reductions of working capital. Dividend seems safe for now + room for acquisitions in a depressed environment #stocks #tsx— Late Cycle Investing (@latecycle_nick) July 28, 2020
If the next administration increases spending on infrastructure, steel and other material stocks could benefit. Infrastructure investment lifts the demand for metals like steel, aluminum, and copper, along with materials like cement.
Top U.S. cyclical stocks
The financial sector is also cyclical in nature. As layoffs increase in an economic downturn, banks see an increase in their delinquencies. Berkshire Hathaway chair Warren Buffett, who has a flair for banking stocks, has also been selling stakes in some of his bank holdings. However, Buffett has added Bank of America shares this year. Banking stocks like Bank of America could be good cyclical plays to play the economic recovery theme.
Energy stocks are also cyclical in nature. The earnings of upstream energy companies are closely tied with energy prices. Energy prices have tanked this year due to the oversupply situation, which was further amplified by the demand deterioration from the pandemic. Energy stocks are among the worst performing sector this year.
Occidental Petroleum, Marathon Oil, Apache Corporation, and Devon Energy are among the top 10 losers in the S&P 500. Oil stocks could bounce back when the bearish cycle in crude oil reverses. However, the near term outlook is not very bullish for oil prices.
Invested 25% in stocks past week. Cruise Lines at 30y low ( $CCL, $NCLH) & tech stocks that multiplied revenues while price remained flat ( $BIDU, $TWTR).— Marc De Mesel (@MarcDeMesel) September 26, 2020
Didn't cost me any cash as borrowed -25% #Gold ETF's at 0.3% interest, sold it & bought stocks with proceeds. Recommend! pic.twitter.com/o3qzYj4ibF
Cruise line stocks are part of the consumer discretionary industry. The sector is staring at a survival crisis currently as cruise activity is still barred in many jurisdictions. However, cruise line stocks could rise sharply if a credible vaccine is found for the coronavirus.
Airline stocks have also fallen sharply this year. The sector is also cyclical in nature and depends on consumer discretionary spending. However, for categorization purposes it is identified as an industrial stock. U.S. airline companies like American Airlines and United Airlines have announced massive furloughs as the Congress hasn’t yet passed the next stimulus bill. The previous stimulus bill helped the airline industry to pay its employees’ salaries. The airline sector is another beaten down cyclical sector that investors can consider.