In this article, we discuss 10 best counter cyclical stocks to buy now.
The United States economy is hurtling towards a recession as a hawkish Federal Reserve continues to stomp down on inflation with aggressive rate hikes. In this macro environment, the benchmark indexes of the stock market, like the S&P 500, the NASDAQ Composite, and the Dow Jones Industrial Average, are all trading at new lows as investors take money out of stocks and pile into more value-friendly assets. The three indexes are down an alarming 22%, 32%, and 16% year-to-date as of October 20, respectively.
In this macro environment, investors with growth-heavy portfolios are eagerly seeking out stocks which perform well during economic downturns and slowdowns. These counter cyclical stocks, unlike cyclical options like The Walt Disney Company (NYSE:DIS), The Home Depot, Inc. (NYSE:HD), and The Mosaic Company (NYSE:MOS), tend to perform well during recessions. For example, during a recession, sales of alcoholic beverages and fast food items increase as people seek to ward off depression and anxiety amid job cuts and inflation.
Similarly, there is a general bias in favor of auto part firms during slowdowns as people are more likely to buy used cars or repair existing vehicles instead of buying new cars at inflated rates. Discount retailers also witness an uptick in activity during slowdowns. The sales of tobacco companies increase as well. Several top economists, including Jamie Dimon, the CEO of JPMorgan Chase, have forecast a recession in the US in 2023, advising investors to prepare for the upcoming storm through investments in counter cyclical firms.
Our Methodology
The companies that tend to outperform the wider market during economic downturns or recessions were selected for the list. The analyst ratings of these firms and the latest updates related to them are also discussed to provide some additional context. Data from around 900 elite hedge funds tracked by Insider Monkey in the second quarter of 2022 was used to identify the number of hedge funds that hold stakes in each firm.
Best Counter Cyclical Stocks to Buy Now
10. Diageo plc (NYSE:DEO)
Number of Hedge Fund Holders: 22
Diageo plc (NYSE:DEO) produces, markets, and sells alcoholic beverages. It is one of the best counter cyclical stocks to invest in. On July 5, Vita Coco, a beverage company, and Diageo plc announced that they are collaborating to launch a line of premium canned cocktails crafted with a blend of Captain Morgan rum and Vita Coco coconut water. The line is expected to be in the market by 2023.
At the end of the second quarter of 2022, 22 hedge funds in the database of Insider Monkey held stakes worth $887.4 million in Diageo plc (NYSE:DEO), compared to 21 the preceding quarter worth $836.7 million.
Just like The Walt Disney Company (NYSE:DIS), The Home Depot, Inc. (NYSE:HD), and The Mosaic Company (NYSE:MOS), Diageo plc (NYSE:DEO) is one of the best stocks to buy now according to hedge funds.
In its Q2 2022 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Diageo plc (NYSE:DEO) was one of them. Here is what the fund said:
“Diageo plc (NYSE:DEO) is a leading global distiller and brewer which addresses the large ($500 billion-plus) and fragmented market for spirits. With its portfolio of premium products, we see Diageo as a steady compounder poised for sustained, above industry growth. The company’s margins remain below pre-COVID levels in a number of geographies and should continue to recover as channels reopen, though we also see opportunities for consistent margin expansion beyond this period of rebound. The spirits category is not immune to weaker consumer spending nor inflation; however the majority of Diageo’s profits are from the U.S. market, which has historically been more resilient. Additionally, the company has a number of margin levers to help combat rising input costs.”
9. Brown-Forman Corporation (NYSE:BF-B)
Number of Hedge Fund Holders: 28
Brown-Forman Corporation (NYSE:BF-B) manufactures, distills, bottles, imports, exports, markets, and sells various alcoholic beverages. On October 6, Brown-Forman Corp revealed that it has agreed to acquire the Diplomatico Rum Brand and related assets from Distillers United Group. The deal is expected to close within 90 days. Distiller United Group will continue to produce and age the complex Diplomatico Rum after the deal.
On October 10, Wedbush analyst Gerald Pascarelli initiated coverage of Brown-Forman Corp (NYSE:BF-B) stock with a Neutral rating and a $70 price target, noting that the company reported solid results for the first fiscal quarter.
Among the hedge funds being tracked by Insider Monkey, London-based investment firm Fundsmith LLP is a leading shareholder in Brown-Forman Corporation (NYSE:BF-B), with 12 million shares worth more than $856.9 million.
8. O’Reilly Automotive, Inc. (NASDAQ:ORLY)
Number of Hedge Fund Holders: 41
O’Reilly Automotive, Inc. (NASDAQ:ORLY) operates as a retailer and supplier of automotive aftermarket parts, tools, supplies, equipment, and accessories in the United States. It is one of the major counter cyclical stocks to invest in. On October 12, O’Reilly Automotive announced that it has opened a new store of O’Reilly Auto Parts on the Monmouth Independence Highway. The store celebrated a grand opening which ran from October 12 to 15.
On October 12, MKM Partners analyst David Bellinger maintained a Buy rating on O’Reilly Automotive (NASDAQ:ORLY) stock and raised the price target to $810 from $770, noting that O’Reilly Automotive (NASDAQ:ORLY) is one of the few S&P 500 consumer companies with positive share price performance.
Among the hedge funds being tracked by Insider Monkey, Virginia-based firm Akre Capital Management is a leading shareholder in O’Reilly Automotive, Inc. (NASDAQ:ORLY), with 1.6 million shares worth more than $992.8 million.
At the end of the second quarter of 2022, 41 hedge funds in the database of Insider Monkey held stakes worth $2.4 billion in O’Reilly Automotive (NASDAQ:ORLY), compared to 48 in the preceding quarter worth $2.5 billion.
7. AutoZone, Inc. (NYSE:AZO)
Number of Hedge Fund Holders: 42
AutoZone, Inc. (NYSE:AZO) retails and distributes automotive replacement parts and accessories. It is one of the elite counter cyclical stocks to invest in. On October 12, in a regulatory filing, AutoZone revealed that its CEO sold 14,500 shares of common stock in a total transaction size of $33 million. On October 4, AutoZone stated that its board authorized an additional $2.5 billion share buyback to its ongoing repurchase program.
On September 27, Argus analyst Taylor Conrad maintained a Buy rating on AutoZone (NYSE:AZO) stock and raised the price target to $2,330 from $2,210, noting that the company’s earnings have rebounded from their pandemic lows and have now topped consensus estimates for nine consecutive quarters.
At the end of the second quarter of 2022, 42 hedge funds in the database of Insider Monkey held stakes worth $1.3 billion in AutoZone, Inc. (NYSE:AZO), compared to 38 in the preceding quarter worth $1.5 billion.
6. eBay Inc. (NASDAQ:EBAY)
Number of Hedge Fund Holders: 43
eBay Inc. (NASDAQ:EBAY) operates marketplace platforms that connect buyers and sellers in the United States and internationally. It is one of the prominent counter cyclical stocks to invest in. On August 23, eBay revealed that it has acquired myFitment, a group of companies that deliver tools and technical support to help online automotive and accessories sellers. This acquisition expands eBay in the auto parts and accessories category. The terms of the deal were not disclosed.
On October 6, Jefferies analyst John Colantuoni maintained a Hold rating on eBay (NASDAQ:EBAY) stock and lowered price target to $42 from $52, noting that the company is leaning on a new risk/reward strategy to achieve long term profit.
Among the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Harris Associates is a leading shareholder in eBay Inc. (NASDAQ:EBAY), with 4.89 million shares worth more than $203.8 million.
At the end of the second quarter of 2022, 43 hedge funds in the database of Insider Monkey held stakes worth $1.3 billion in eBay Inc. (NASDAQ:EBAY), compared to 44 in the preceding quarter worth $1.6 billion.
In addition to The Walt Disney Company (NYSE:DIS), The Home Depot, Inc. (NYSE:HD), and The Mosaic Company (NYSE:MOS), eBay Inc. (NASDAQ:EBAY) is one of the best stocks on the radar of elite hedge funds.
In its Q2 2022 investor letter, Smead Capital Management, an asset management firm, highlighted a few stocks and eBay Inc. (NASDAQ:EBAY) was one of them. Here is what the fund said:
“We believe you need to avoid these formerly glamorous stock groups for many years. We loved to use eBay Inc. (NASDAQ:EBAY) as a poster child back in 1999 for the dotcom bubble. We bought it eight years later and have done very well on it. We wouldn’t have done well if we bought it in the early years of that bear market, or even five years later. If you think this bear will be shorter and or less damaging than the dotcom bear market of 2000-2003, you could be showing your inexperience!”
5. Mondelez International, Inc. (NASDAQ:MDLZ)
Number of Hedge Fund Holders: 48
Mondelez International, Inc. (NASDAQ:MDLZ) manufactures, markets, and sells snack food and beverage products worldwide. It is one of the best counter cyclical stocks to invest in. On October 12, Mondelez India’s Sri City factory was awarded the World Economic Forum’s 4th Advanced Industrial Revolution 4IR Digital Lighthouse award. It was one of the first FMCG plants in India which was awarded for digital excellence.
On October 14, Morgan Stanley analyst Pamela Kaufman maintained an Overweight rating on Mondelez International (NASDAQ:MDLZ) stock and lowered the price target to $63 from $70, citing the company’s strong pricing-led organic sales growth amid significant gross margin pressure.
At the end of the second quarter of 2022, 48 hedge funds in the database of Insider Monkey held stakes worth $1.8 billion in Mondelez International, Inc. (NASDAQ:MDLZ), compared to 48 in the previous quarter worth $1.6 billion.
4. The TJX Companies, Inc. (NYSE:TJX)
Number of Hedge Fund Holders: 49
The TJX Companies, Inc. (NYSE:TJX) operates as an off-price apparel and home fashions retailer. It is one of the top counter cyclical stocks to invest in. On October 17, JPMorgan analyst Matthew Boss maintained an Overweight rating on The TJX Companies, Inc. (NYSE:TJX) stock with an $80 price target, noting that the company historically ranks within the top 10 percentile of consumer discretionary equity performance during an economic slowdown or contraction.
At the end of the second quarter of 2022, 49 hedge funds in the database of Insider Monkey held stakes worth $1.55 billion in The TJX Companies, Inc. (NYSE:TJX), compared to 55 in the preceding quarter worth $1.9 billion.
In its Q4 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and The TJX Companies, Inc. (NYSE:TJX) was one of them. Here is what the fund said:
“The pandemic created opportunities for us to be more aggressive in a variety of areas of the market. We were opportunistic throughout the year, for example, in positioning the portfolio to benefit from a flush consumer eager to return to spending and traveling. New positions included TJX, an off-brand retailer with a large presence in the U.S. and Europe that should continue to benefit from the contraction of many traditional retailers, particularly as consumer spending resumes.”
3. McDonald’s Corporation (NYSE:MCD)
Number of Hedge Fund Holders: 50
McDonald’s Corporation (NYSE:MCD) operates and franchises McDonald’s restaurants in the United States and internationally. It is one of the elite counter cyclical stocks to invest in. On September 13, McDonald’s revealed that it had reached a 15-year virtual power purchase agreement with EDF Renewables North America, a business electricity and gas contractor, in a bid to address its restaurant electricity carbon footprint.
On September 27, Citi analyst Jon Tower maintained a Neutral rating on McDonald’s (NYSE:MCD) stock and lowered the price target to $246 from $275, noting that currency and macro challenges in Europe were looming over the forward Q3 estimates of the firm.
2. Dollar General Corporation (NYSE:DG)
Number of Hedge Fund Holders: 51
Dollar General Corporation (NYSE:DG) is a discount retailer that provides various merchandise products in the southern, southwestern, midwestern, and eastern United States. It is one of the premier counter cyclical stocks to invest in. On October 12, according to a report from Placer.ai, Dollar stores are expected to see increased visits throughout the holiday shopping season as investors control spending.
On September 16, JPMorgan analyst Matthew maintained an Overweight rating on Dollar General (NYSE:DG) stock and raised the price target to $294 from $287.
At the end of the second quarter of 2022, 51 hedge funds in the database of Insider Monkey held stakes worth $2.4 billion in Dollar General Corporation (NYSE:DG), compared to 53 in the previous quarter worth $2.25 billion.
In its Q2 2022 investor letter, Aristotle Capital Management, LLC, an asset management firm, highlighted a few stocks and Dollar General Corporation (NYSE:DG) was one of them. Here is what the fund said:
“Dollar General Corporation (NYSE:DG) contributed to performance in the second quarter following the report of first quarter earnings that were above expectations. Strength in the second quarter was driven by better-than-expected sales of consumable items. Guidance for the remainder of the year was increased. In addition to solid earnings, forecasts for the increasing expectations of a recession drove positive sentiment towards consumer discretionary companies with more predictable revenue like dollar stores.”
1. Philip Morris International Inc. (NYSE:PM)
Number of Hedge Fund Holders: 56
Philip Morris International Inc. (NYSE:PM) operates as a tobacco company working to deliver a smoke-free future and evolving its portfolio for the long-term to include products outside of the tobacco and nicotine sector. It is one of the major counter cyclical stocks to invest in. On September 14, Philip Morris International revealed that it has appointed two former United States Food and Drug Administration officials to key positions with a goal of helping the company in the transformation to smoke-free products.
On October 14, Stifel analyst Christopher Growe maintained a Buy rating on Philip Morris (NYSE:PM) stock and lowered the price target to $105 from $115, noting that the company is expected to show stronger earnings growth across the second half of the year.
Among the hedge funds being tracked by Insider Monkey, Florida-based investment firm GQG Partners is a leading shareholder in Philip Morris International Inc. (NYSE:PM), with 30 million shares worth more than $3 billion.
You can also take a peek at 10 Best MLP Dividend Stocks to Buy and 10 Best Stocks to Buy According to Billionaire Dan Loeb.
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Disclosure. None. 10 Best Counter Cyclical Stocks to Buy Now is originally published on Insider Monkey.
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