Over the trailing year, we’ve seen one of the most paradoxical developments in modern history. Despite suffering the ravages of a once-in-a-century pandemic, the equities market has gone on to set record milestones. Even now, the recovery is a tentative one — yet certain investments, including cyclical stocks, continue to post impressive numbers.
Based on the fundamentals, you’d think that secular names, or those companies that are tied to necessary businesses — food, utilities, toilet paper — will outperform cyclical stocks. To be perfectly honest, I’m skeptical about the remarkable enthusiasm we see in the equities sector. Particularly, I do not like that trading securities on margin hit another all-time record in March 2021.
Speculation seems to be out of control, yet the market is the ultimate arbiter. Therefore, if you are bullish, you’re not entirely unjustified in your decision not to fight the tape. As well, certain indicators suggest that we could see a sustained move higher. For instance, if President Joe Biden’s administration is successful in building back better, that would translate very well for cyclical stocks, which depend on strong consumer sentiment.
Also, it’s fair to point out that we live in a bifurcated economy. For instance, despite a robust March jobs report, the national employment level is down 5% from where it was just prior to the novel coronavirus pandemic. Obviously, that’s not a good look. However, the employment level for bachelor’s degree holders is only 0.6% off pre-pandemic levels; basically, no change.
This doesn’t mean bullish investors should get complacent. But if you’re a believer in the economic recovery narrative, you certainly have some intriguing evidence to back you up. Should you want to make a wager on this thesis, you should check out these cyclical stocks.
- Signet Jewelers (NYSE:SIG)
- Kering (OTCMKTS:PPRUY)
- Ross Stores (NASDAQ:ROST)
- Hawaiian Holdings (NASDAQ:HA)
- Uber (NYSE:UBER)
- Darden Restaurants (NYSE:DRI)
- Dave & Buster’s Entertainment (NASDAQ:PLAY)
Again, because of the rampant speculation as evidenced by the trading on margin, you should be careful about any investment, whether they be risk-on, risk-off or something in between. But if you’re convinced that we’re going to roar back from this public health crisis, these are the cyclical stocks that can accrue substantial benefits.
Cyclical Stocks: Signet Jewelers (SIG)
Even if you’re dead set on cyclical stocks, Signet Jewelers is one of those companies that has probably surprised you. From the latest read of the personal saving rate (March 2021), this metric shot up to 27.6% on an annualized basis. This is the highest such reading since April 2020, when the personal saving rate hit an unprecedented 33.7%.
With people saving money like mad, why is SIG stock doing so well? On a year-to-date basis, shares are up 137%. It just doesn’t make much sense. This isn’t the time for people to spend foolishly and lavishly.
Well, I guess that depends on your income level. According to a report from Rapaport, those who have money are demonstrating a massive willingness to spend it. For example, “China’s polished-diamond imports rose almost fivefold in the first quarter as the mainland retail market extended its recovery….”
It’s not just Chinese buyers that are buying up high-quality diamonds, although they make up a significant portion of demand. Combined with other purchases worldwide, the buying pressure has pushed diamond prices substantially northward. It doesn’t look like demand will wane anytime soon, which is why SIG is one of the most compelling cyclical stocks to gamble on.
Not to be confused with coffeemaker Keurig, Kering is a French-based multinational corporation that focuses on luxury goods. It owns some of the world’s most recognized brands, including Gucci, Saint Laurent and Bottega Veneta. Ordinarily, you wouldn’t think that PPRUY stock would do well following a devastating pandemic. But then, you would be wrong.
Over the trailing year, Kering shares have gained nearly 82%. On a YTD basis, the equity unit is up almost 17%. Over the last month, PPRUY has been on the move, registering double-digit gains. And if I’m interpreting the charts correctly, shares could have more upside.
While the bullishness in this premium luxury outfit seems a bit ridiculous, it’s all in how you look at things. Yes, people who are in the lower income bracket are hurting. However, PPRUY stock doesn’t depend on that category. And as I explained, the economy for educated and skilled workers is fairly robust.
Plus, you have the China effect. After the government there imposed perhaps the severest Covid-19-related lockdown, the Chinese apparently succeeded in overcoming the virus (if its reporting is to be believed). Certainly, the strength of the Chinese consumer demonstrates that perhaps the government did win its war against the pandemic. That bodes very well for luxury-themed cyclical stocks like PPRUY.
Cyclical Stocks: Ross Stores (ROST)
When the coronavirus initially breached our borders, most publicly traded securities suffered losses. Among the worst were cyclical stocks levered to the apparel segment like Ross Stores. Basically, the health crisis represented a double whammy for ROST stock.
First, Ross Stores specializes in off-price apparel, which is a lifesaver for many working households. Pre-pandemic, the company offered a way for parents to buy branded clothes for their kids but without the exorbitant markups. But without schools in session, there was really no point in shopping at Ross.
Second, you have the impact from the workers themselves. Ross and other off-price retailers provide a great place to pick up office attire for cheap. But thanks to work-from-home protocols, people didn’t need to spend much for their attire.
But now that employees are returning back to the office, ROST stock could see an uptick. In fact, investors have already bid up shares in anticipation of this return to normal. Sure, that’s not what many worker bees want but guess what? If they don’t return, they risk replacement from a gig worker or a foreign one. Thus, Ross is one of the cyclical stocks that even skeptics like me can believe in.
Hawaiian Holdings (HA)
Before I get into my take on Hawaiian Holdings, I must admit that I haven’t had the warm and fuzzies for airliner-related cyclical stocks. I think it’s safe to say that quite a few of us are still uncomfortable about person-to-person contact. Yes, Covid-19 cases have faded substantially from their peak and the vaccine rollout is overall encouraging.
But do you want to sit next to hundreds of strangers in a flying tube? Even in the best of times, it’s an uncomfortable place to be. Plus, you have so much social tension that it’s difficult to envision that flights will resume friction-free. Therefore, I retain my skepticism toward cyclical stocks in the public transportation sphere.
However, if I had to pick an airliner to invest in, I might go with HA stock. First, the Centers for Disease Control and Prevention (CDC) reported that more than 150 million people have received at least one dose of Covid-19 vaccines and almost 111 million are fully vaccinated.
Now, with that many people fully vaccinated, you would expect impressive figures from pent-up travel demand to be a catalyst in HA stock’s future.
That said, Hawaii looks different than most other U.S. states. So if you’re going there, you probably have a more tolerant disposition, making Hawaiian flights much more comfortable than others.
Cyclical Stocks: Uber (UBER)
Recently, I took two trips through ride-sharing service Lyft (NASDAQ:LYFT). I must say that the experience was startlingly normal. In my conversation with both drivers, they were eagerly awaiting a full return to normal. As people come out of quarantine, that translates to more money in their pockets.
Furthermore, one driver mentioned that he got vaccinated as soon as they were available. In his mind, it was ridiculous for Americans not to take advantage of the enormous blessing that the vaccines represent.
Sure, it’s an anecdote but for what it’s worth, the ride-sharing business appears to be back on the upswing. However, with all due respect to Lyft and its drivers, I’m going to give the investment edge to Uber.
Primarily, I say this because UBER stock can go either way. For those that want to venture out, the core ride-sharing business is relevant and features a robust international footprint. Second, the company serves those who still want to self-quarantine with platforms like Uber Eats.
Finally, as said before, air travel demand relative to pre-pandemic levels has been very impressive. And with Uber’s wider footprint, the recovery in the ride-sharing economy could end up being more beneficial to UBER stock.
Darden Restaurants (DRI)
One of the main reasons why cyclical stocks suffered badly during the initial coronavirus onslaught is that this sector tends to address wants more than needs. To be clear, that’s not 100% the case with the cyclicals. But with companies like Darden Restaurants, it very much is true. No one needed to be in a public eatery during a pandemic.
Therefore, it wasn’t at all surprising when DRI stock absorbed hideous losses early in the public health scare. From the point right before the Covid-related collapse to its March bottom last year, DRI shed more than two-thirds its market value.
Unfortunately, there was really nothing that could be done. The restaurant industry became the poster child for the pandemic’s devastating economic impact. During the worst of the crisis, industry experts warned that 85% of independent restaurants may close for good.
But with the vaccine rollout and general pent-up demand, DRI stock is on a comeback trail. Over the trailing year, shares are up nearly 110%. Against this year’s January opener, Darden is up almost 20%.
While it’s hard to say if the momentum will continue, Darden has the advantage of brand-name recognition. People are creatures of habit, which could bolster DRI stock if we indeed have a true recovery.
Cyclical Stocks: Dave & Buster’s Entertainment (PLAY)
While virtually cyclical stocks suffered catastrophic losses when the Covid-19 crisis initially walloped us, Dave & Buster’s Entertainment absorbed a particularly pernicious loss. Between Feb. 20 and March 20 of last year, PLAY stock hemorrhaged a staggering 83%. Despite what I thought was an impressive dead-cat bounce, I declared the underlying company an equity unit you shouldn’t touch.
Thanks to the benefit of hindsight, I can see that I was wrong to question PLAY stock — dead wrong. Over the trailing year, shares jumped a remarkable 315%. And on a YTD basis, momentum remains powerful, with shares almost 50%. Clearly, investors are anticipating a return to normal. Plus, with so many folks denied access to in-person entertainment venues, Dave & Buster’s could enjoy pent-up demand.
But perhaps we shouldn’t just view PLAY as one of the cyclical stocks to buy but also as a benchmark. If American consumers really believe that the pandemic is over, increased attendance at Dave & Buster’s would demonstrate this. Here, you have people running around, touching arcade machines as well as food and beverages being served.
It’s a Petri dish but a non-floating kind. So if PLAY does well, that might justify the other cyclical stocks on this list.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.