Best Consumer Cyclical Stocks

Cyclical stocks are often considered an offensive tactic in investing. You use them to hopefully generate high returns as fast as possible when the economy expands. Auto manufacturers, clothing stores, hotel and travel, airlines, retail stores and luxury goods manufacturers are classic cyclicals. Why? When the economy is booming, consumers are more likely to remodel their homes, take a vacation, buy a new car, or buy an expensive handbag. Because these market segments tend to cycle with the economy, they’re not always the strongest. So, why would you purchase consumer cyclical stocks? How can you turn cyclical stocks into profits over the long and short-term?

Here are a few consumer cyclical stocks you should have your eyes on.

Quick Look: The Best Consumer Cyclical Stocks

• Foot Locker, Inc.
• Home Depot
• Amazon
• Starbucks
• JD.com
• Walt Disney
• AutoZone
• Nordstrom
• Lululemon Athletica

Overview: Consumer Cyclical Stocks

Consumer sectors are divided into 2 categories: defensive and cyclical. Defensive includes habitual and staple items, like groceries, liquor and bulk commodities. Cyclical comprises financials, technology, industrials and consumer discretionary items. These are the kinds of things that consumers don’t buy when the economy begins to dip out of control.

Cyclical stocks are sensitive to economic movements and their prices and profits are impacted by business and the health of the economy. The stock of companies in the cyclical sector may suffer decreased profits and typically lose market value during an economic hardship as people try to reduce unnecessary expenses. Share prices and profits can rebound sharply when the economy gains strength — people have more disposable income to spend.

Because cyclical stocks reflect the business sentiment of the economy, you may be able to gauge its general direction by understanding the movement of cyclicals. When interest rates fall, these stocks typically have better valuations — which are a massive boost. These boosts cannot last forever, and that is what should push investors to research diligently and follow current events carefully.

Remember, however, that cycles can favor some businesses and not others. The market is fickle, and consumers could turn to any other brand or establishment at any time. Plus, trends might favor a company that performed marginally until the market shifted. Likewise, other businesses could be pushed to the side. Keep your eyes on the market and current events so you know where your assets sit in the current consumer cycle.

As you wait for cycles in the economy to shift, you may find ample opportunity for swing trading and value investing. You could easily swing trade when you see changes coming. Or, you can cash out value investments you made some time ago because that makes the most sense right now. Some investors might even do so for big purchases, to pay for a child’s education, pay off debt, etc.

Best Online Brokers for Consumer Cyclical Stock

Online brokers don’t just provide the platform to execute stock trades. They also provide extensive research material, charting capabilities and indicators to help you better understand the stock market. Take a look at Benzinga’s online broker recommendations. If you’re planning to day trade, remember that you need to find a broker that makes the process easier. You don’t day trade with a big name company unless they make it easy. If not, you may need to choose a different broker where you can build your day trading portfolio. (You can hold stocks elsewhere.)

Features to Look for in Consumer Cyclical Stock

Here are a few indicators based on which you can assess a cyclical stock.

• Earnings per share (EPS) is the amount each share would receive if a company paid out all profits to shareholders. It reveals how companies in the same industry compare. Look for stocks with a pattern of earnings growth and a habit of reinvesting a significant fraction of earnings in the growth of the business. You can find a company’s earnings per share ratio on its annual financial report.
• Market share growth is a fundamental goal for most consumer cyclicals. Most companies aim at boosting their sales at a quicker pace than their competition. While some stocks disclose their actual market share, investors often judge a company’s growth rate by how it stacks up against its competition. A persistent, dominant market share implies sales growth and higher profit margins year after year.
• Dividend yield is a stock’s dividend reported as a percentage of its share price. If a share of stock is selling at $50 and the company pays out $2 per year in dividends, then its yield is 4%. Besides generating income for the shareholders, dividends are a good indicator of a company’s strength compared to its competition. A history of rising dividends tells of a strong company that maintains payouts at all times.
• Swing trading options become a bit more robust if you’re investing in cyclical stocks. You can watch them swing, enter and exit positions quickly when you like and stay out of these positions if the stocks aren’t swinging the way you would prefer.
• Long-term potential could be there with some consumer cyclical stocks. This is rare, but some stocks fall out of a cycle and turn into blue chips or even consumer defensive stocks. If you’re researching the asset, you can better predict what the stock will do in the future.

How to Track Market Cycles

Market cycles are unpredictable, but you can often see them coming. For example, anyone who was watching the economy could have predicted that a full shutdown (as occurred in the beginning of the COVID-19 pandemic) could have pushed delivery services like DoorDash (NYSE: DASH) to the forefront. In the same breath, you may see news that a defense contractor is about to get a big new contract, meaning its stock could perform better in the future.

How do you track market cycles? You can track:

• Current events
• Earnings reports
• Government contracts
• Social media
• M&A news

Track the Consumer Demand With Cyclicals

Ultimately, cyclical stock investing is a game of patience, and the range of stocks goes beyond the 5 companies described above. But if you’re interested in adding some exposure to a high-growth segment of the economy, these stocks are a good starting point. Closely monitor economic events to better understand which industries are on the road to recovery. Based on this information, you may consider trimming or adding your positions.