Under the traditional or commonplace definition, cyclical stocks are investments that are largely impacted by macroeconomic events. In a bull market, for instance, you’ll see Wall Street top dogs transition into cyclical sectors to advantage growth opportunities. Of course, with the incredibly disruptive novel coronavirus, all bets are off the table.
Or are they? To be sure, conservative investors will want to give their portfolio a healthy dose of secular names, or assets that perform reliably well irrespective of market conditions. And some of these investments, such as food-related securities, are acting very much like cyclical stocks due to their newfound relevance and momentum.
However, for those that can stomach a little risk, genuine cyclical stocks have an opportunity for potentially massive upside. Unlike other recessionary periods, the new normal was arguably not caused by an economic vulnerability. Prior to the pandemic, one of our fiscal headwinds was the U.S.-China trade war. Still, both sides were making headway until disaster struck.
Thus, it’s not unreasonable to assume that some cyclical stocks will bounce back once the coronavirus fades away or until we have a vaccine. Once we get back to normal – as in, a real normal – these companies could enjoy a so-called V-shaped recovery:
- Microsoft (NASDAQ:MSFT)
- FireEye (NASDAQ:FEYE)
- Blink Charging (NASDAQ:BLNK)
- Honda (NYSE:HMC)
- Albemarle Corporation (NYSE:ALB)
- Newmont Corporation (NYSE:NEM)
- Smith & Wesson Brands (NASDAQ:SWBI)
- Sportsman’s Warehouse (NASDAQ:SPWH)
- Canopy Growth (NYSE:CGC)
Finally, keep in mind that the Covid-19 outbreak has not dampened our innovative or resourceful spirit. In some ways, the coronavirus has shifted our priorities. And these nine cyclical stocks to buy stand to benefit from this unprecedented transition.
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Shortly after the pandemic disrupted most Americans’ ability to make a living, the rise of a new set of cyclical stocks – the work-from-home sector – captured everyone’s attention. Logically, you can benefit from this phenomenon through trending names like Slack Technologies (NYSE:WORK), Dropbox (NASDAQ:DBX), and of course Zoom Video Communications (NASDAQ:ZM). But I’m going to start off with a classic: Microsoft.
While the other names I mentioned provide specialized solutions, in this crisis, it doesn’t hurt to have a jack-of-all-trades. But don’t say that Microsoft isn’t a master of none because that’s far from the truth. As a freelancer myself, I have always found the company’s products to be lifesavers. Yes, other competing platforms exist, but they don’t have the same cachet. Therefore, I love the long-term potential of MSFT stock.
And it’s not just my words. Microsoft saw its earnings jump in the first quarter of this year thanks to robust cloud-computing demand during the pandemic. With the coronavirus again rearing its ugly head – aided perhaps by stupid people in this country – MSFT stock might enjoy its own resurgence.
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While employees are probably loving the transition to remote work, management may soon have a different take. No, I’m not talking about suspicions that your supervisor may have about you actually working from home. Rather, the shift to telecommuting opens a new battleground for cybercriminals. Because of this rather fortuitous event for cybersecurity firms, this may finally be the moment for FireEye.
Don’t get me wrong: if you’re looking for cyclical stocks in this space, you’re better off with stable competitors like Palo Alto Networks (NYSE:PANW) or Check Point Software Technologies (NASDAQ:CHKP). However, FEYE stock is rather attractive because of its low price and favorable fundamentals. Frankly, there’s never been a more crucial time for enterprises to protect their digital ecosystem. Thus, FireEye may benefit from a rising tide.
Also, Morgan Stanley raised its price target for FEYE stock to $13 from $12. Although I don’t recommend blindly following analysts’ forecasts, they may have a point here. Plus, this is the best chance that FEYE has ever had for upside.
Blink Charging (BLNK)
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Earlier this year, Blink Charging shares were barely above penny stock status. Admittedly, it got very scary following the initial attack from the coronavirus.
Since the March doldrums, though, BLNK stock has blossomed into one of the most compelling cyclical stocks to buy. What’s more remarkable is that in the past five years, shares were all over the map. Back then, electric vehicles represented only a small portion of automobile sales. And to be clear, that hasn’t changed much. What has changed is the attitude.
You see, the oil price falling below zero wasn’t just an unprecedented, though thankfully temporary calamity. It also was emblematic of a decided consumer shift toward cleaner fuel vehicles. Therefore, the much-discussed hype about a massive transition to electric now has credibility.
But what has practically prevented mainstreaming of EVs is infrastructure. After all, not every driver has access to a garage. That’s where Blink Charging comes into play with its network of charging stations. Thanks to the aforementioned consumer shift, BLNK stock should be a long-term winner.
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If you’re looking to invest in the EV space, you should primarily focus on Tesla (NASDAQ:TSLA). Even if you don’t like the nominal price tag of TSLA, you could always opt for fractional ownership via platforms like Robinhood. That’s probably why gravity seemingly has no effect on Tesla.
Still, there’s something to be said about going for the obvious pick. If you want to enjoy the advantages of cyclical stocks in the EV market but want something with perhaps higher profitability potential, you might want to check out Honda.
As EVs become mainstream, I believe that consumers will expect more from their automotive brands. Though Tesla has a tremendous lead in the space, they don’t stack up too well in terms of reliability. Also, many Tesla owners in the past have been frustrated with the company’s slow repair times. These misfires could provide an underappreciated opportunity for HMC stock as Honda prepares to go EV only from 2025.
As everyone knows, Honda has built a longstanding reputation for reliability. It’s not that much of a stretch to assume it will apply the same principle to EVs. Also, Honda’s extensive dealership networks could provide far superior service for customers.
Of course, this is a riskier contrarian play. But if you prefer unconventional thinking, HMC stock could be your ticket to success.
Albemarle Corporation (ALB)
Out of all the high-probability cyclical stocks available, those levered to the EV market could witness the biggest gains. From true energy independence to environmental concerns, electric power hits the right notes for the emerging generation. However, picking individual EV players is fraught with risk. To mitigate the dangers to your portfolio, you may want to consider Albemarle Corporation.
An industry leader in lithium and lithium derivatives, Albemarle essentially acts as an umbrella investment. At a certain point, you’d expect auto rivals to challenge Tesla’s throne. Though Tesla enjoys brand dominance, it can’t possibly sell to every American driver. For instance, the company is leaving open the economy car segment, which should see intense competition. And that just translates to higher demand for lithium, boosting ALB stock.
Theoretically, EVs are easier to make, which is another reason why automakers are rushing into the arena. Just the presence of mass (and viable) competition could shake things up at Tesla. But for ALB stock, more competition will bring in more consistent revenues.
Newmont Corporation (NEM)
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To be perfectly honest, cyclical stocks related to the gold industry have relied on an old but dangerous adage: “this time, it’s different.” Unfortunately, every time someone uttered this phrase following gold’s record-breaking move last decade, enthusiasm quickly met with disappointment. Nevertheless, I’m bullish on Newmont Corporation.
First, this time, it really is different. Though we’ve suffered pandemics in our past, we’ve never encountered one that forced state governments to shut their economies. Typically, gold rises on fear and uncertainty, and there’s plenty of that going around. Thus, with higher demand for the underlying commodity, NEM stock is finally enjoying a credible fundamental tailwind.
Second, the resurgent coronavirus is almost screaming the case for gold-related investments. Obviously, another round of state shutdowns will cause much calamity. With federal relief funds to support the unemployed about to expire soon, NEM stock could jump on the fear trade.
But the biggest catalyst could be the Federal Reserve. Given that no playbook exists for responding to this crisis, the central bank will probably adopt an inflationary policy. This could be the spark that sends gold prices to absolutely ridiculous levels.
Smith & Wesson Brands (SWBI)
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Not all rises in cyclical stocks are due to uplifting reasons. Case in point is the unbelievable growth in Smith & Wesson Brands. Ironically, SWBI stock didn’t do all that well under the Trump administration. First, the fear of Democrats taking away people’s firearms just didn’t exist. Second, crime went down during his first term, although many question the President’s role in this trend.
But now, the narrative has completely changed. The coronavirus exposed Trump as an effective leader only in good times. When the chips are down, he appears vulnerable. Unfortunately for him, this disaster struck on a pivotal election year.
Analyzing the dynamics of the political race, I still believe Trump has a shot of winning. However, that’s an unpopular opinion and the rise of SWBI stock reflects this.
Also bolstering the case for Smith & Wesson is that violent crime is now surging in major U.S. cities. With law enforcement departments throughout the U.S. beleaguered due to nationwide calls for justice, individual citizens are left with few options other than to take matters into their own hands.
Sportsman’s Warehouse (SPWH)
With a second wave of infections hitting us like a freight train, we are almost surely headed toward an ugly recession. Yes, the White House has boasted about record-breaking jobs gains in May and June. However, most of that came from low-paying service sector occupations that partially returned when states began reopening.
Now, that’s off the table. Logically, that will translate to a truly ugly jobs report for either July or August. And that doesn’t bode well for cyclical stocks geared toward the retail market. However, investors should make an exception for Sportsman’s Warehouse.
Because of the word “sports” in the company name, you might think that this is an athletic apparel retailer. You’re not too far off. I call Sportsman’s Warehouse Nike (NYSE:NKE) for coalminers.
Basically, it sells guns – lots and lots of guns. As I mentioned with Smith & Wesson, this is a very popular sector; hence, the meteoric rise in SPWH stock.
Additionally, I’m not sure when the enthusiasm will end. While cries for defunding the police may sound good for some political groups, I’m positive that it’s scaring the heck out of most people. Of course, due to cancel culture, they’re not going to admit that.
Instead, they’re buying guns, which is why you should look into buying SPWH stock.
Canopy Growth (CGC)
When Canada became the first G7 member state to legalize recreational marijuana, many folks – including yours truly – thought that this would usher in a transformative paradigm shift. From my perspective, we were talking about turning a previously illegal market into a legal and therefore taxable one. So, I was excited about Canopy Growth and CGC stock. Eventually, though, that excitement turned into disappointment.
In hindsight, Canopy like so many of its rivals focused almost exclusively on growth. Unfortunately, the legal cannabis market in Canada was not prepared to handle the rollout. Much of the setbacks came from the government, specifically cannabis license application backlogs. Also, not enough dispensaries existed in high-demand provinces, causing supply-demand bottlenecks.
Still, that’s not to excuse the business leaders in this market. They made poor decisions, which ultimately hurt investments like CGC stock.
However, the coronavirus could give controversial cyclical stocks like CGC another lease on life. Specifically, the new normal has been tough on mental health. Though research is still being conducted in this area, cannabis and non-psychoactive cannabidiol (CBD) may offer organic relief.
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. As of this writing, he is long gold.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.