In this article, we discuss 10 best cyclical stocks for inflation.
What Is A Cyclical Stock?
A stock is said to be cyclical if its business model depends on economic cycles of expansion and recession. A cyclical stock typically performs better in the market when the economy is thriving and businesses are booming. Cyclical stocks are naturally volatile and can prove to be lucrative investments during economic expansion. Companies with a cyclical business model can benefit from price hikes as they can effectively pass on high prices to their consumer base.
Surging Inflation in 2022
The U.S. Bureau of Labor Statistics reported annual inflation rate in the United States had risen to 7.9% this February, the highest it has been since January of 1982. The energy index went up by 25.6 percent year over year. Inflation accelerated for food as the index had risen by 7.9 percent over the past year. The index tracking new vehicles peaked at 12.4%, and the index for used cars and trucks rose 41.2%. Excluding food and energy, core inflation had risen to 6.4%, the highest since August 1982.
The Ukraine Conflict Drives Prices Higher
On February 24, 2022, Russia declared war on Ukraine which caused commodities to attain new all-time highs. During the first week of March, Crude oil almost touched $130 per barrel, the highest it has been since the 2008 crisis. Prices for other commodities such as gold, copper, and nickel skyrocketed as well.
Cyclical stocks are high-risk and high-reward investments that can reap investors handsome profits if investing in them is timed. With businesses pulling out of Russia and investing for expansion in Europe, the global economy is set to stay inflationary for a longer period. Investors can benefit from investing in businesses that are well-positioned to remain profitable amidst strong demand, supply-chain constraints, and surging inflation. Cyclical stocks that are best investments for inflationary periods include The Home Depot, Inc. (NYSE:HD), Exxon Mobil Corporation (NYSE:XOM), and Bank of America Corporation (NYSE:BAC), among others.
Photo by Franki Chamaki on Unsplash
Our Methodology
To find the best cyclical stocks for inflation, we did a careful assessment of companies with cyclical business models and chose the ones that can gain in the current inflationary environment. We narrowed down our selection to stocks that had positive analyst sentiment and were rising in popularity among elite hedge funds. We used Insider Monkey’s database of 924 elite hedge funds to derive the hedge fund sentiment for each stock.
10 Best Cyclical Stocks For Inflation
10. Polaris Inc. (NYSE:PII)
Number of Hedge Fund Holders: 21
Polaris Inc. (NYSE:PII) makes and markets power sports vehicles worldwide. The company operates through six segments: ORV, Snowmobiles, Motorcycles, Global Adjacent Markets, Aftermarket, and Boats. This February, Citi analyst James Hardiman initiated coverage of Polaris Inc. (NYSE:PII) with a Buy rating and a $157 price target. The analyst comments that as supply chain conditions improve, Polaris Inc. (NYSE:PII) can benefit from an improving trade environment.
On January 25, 2022, Polaris Inc. (NYSE:PII) announced that the company generated revenues of $2.17 billion for the fiscal fourth quarter of 2021 and outperformed market consensus by $41.11 million. The company reported earnings per share of $2.16, beating EPS estimates by $0.13. As of April 16, Polaris Inc. (NYSE:PII) has a forward dividend yield of 2.39%, a price-to-earnings ratio of 10.51, and has been consistent with increasing its dividends for over 25 years.
This March, Polaris Inc. (NYSE:PII) announced its plans to expand its distribution facility in Ohio. The expansion of 165,000 square feet would allow for additional rack storage and space to accommodate new automated material handling equipment. It would also create up to 25 new jobs over three years.
Polaris Inc. (NYSE:PII) is one of the best cyclical stocks for inflation because in addition to having the ability to pass on rising prices to consumers, the company has a strong earnings history, has been consistent with growing its dividends, and is expanding its operations to offer more than power sports vehicles. Polaris Inc. (NYSE:PII) is undervalued and a popular stock pick among analysts and value investors.
By the end of the fourth quarter of 2021, 21 hedge funds held long positions in Polaris Inc. (NYSE:PII), up from 15 positions in the preceding quarter. The total stakes of these hedge funds in Polaris Inc. (NYSE:PII) were valued at $194.76 million. Diamond Hill Capital was the leading shareholder in the company at the close of Q4 2021. The fund’s stake amounted to $61.47 million, which covers 0.21% of Diamond Hill Capital’s investment portfolio.
9. Vale S.A. (NYSE:VALE)
Number of Hedge Fund Holders: 25
Vale S.A. (NYSE:VALE) is a Brazilian multinational corporation involved in metals and mining. The company operates through two segments: Ferrous Minerals and Base Metals. On February 24, 2022, Vale S.A. (NYSE:VALE) announced earnings for the fiscal fourth quarter of 2021. According to the company’s earnings report, its earnings per share were valued at $1.46, outperforming market consensus by $0.65. The company’s revenue for the quarter amounted to $12.50 billion. As of March 31, 2022, Vale S.A. (NYSE:VALE) has gained 40.77% over the past six months. As metal prices rise, commodities stocks are expected to fare well during times of inflation.
This March, Jefferies analyst Christopher LaFemina raised his price target on Vale S.A. (NYSE:VALE) to $23 from $20 and maintained a Hold rating on the shares. The analyst has raised his price targets on the metals and mining stocks to support his bullish views on the mining market.
By the end of the fourth quarter of 2021, Vale S.A. (NYSE:VALE) was spotted on 25 hedge fund portfolios. The total stakes of these funds amounted to $1.71 billion of which $434.32 million were of the company’s most prominent shareholder, Fisher Asset Management.
Here’s what Miller Value Partners had to say about Vale S.A. (NYSE:VALE) in its third-quarter 2021 investor letter:
“Vale (VALE) was the top detractor over the quarter, falling 32.6% in sympathy with iron ore’s 48% decline from record highs on China capacity curbs and growing fears of financial issues within the property sector. Vale reported Q2 EBITDA of $11.24Bn, slightly below consensus of $11.47Bn on higher than expected iron ore cash costs. Free cash flow of $6.5Bn (35% annualized yield) came in well ahead of expectations, driving $2.6Bn of stock buybacks and a 1H21 dividend of $7.6Bn, implying year-to-date (YTD) shareholder returns of roughly $13.8Bn (19% of the current market cap). Management maintained FY21 production guidance for iron ore of 315-335 Metric tons (Mt) and lowered year-end 2022 exit capacity to 370Mt (from 400Mt) due to Northern System licensing delays. Additionally, the company hosted their annual Investor Day, outlining new production initiatives aimed at becoming a key supplier to steelmakers in light of decarbonization goals.”
In addition to The Home Depot, Inc. (NYSE:HD), Exxon Mobil Corporation (NYSE:XOM), and Bank of America Corporation (NYSE:BAC), Vale S.A. (NYSE:VALE) is a cyclical stock that investors see an upside in.
8. Marathon Oil Corporation (NYSE:MRO)
Number of Hedge Fund Holders: 40
Global crude oil prices are soaring which is driving the growth of stocks such as Marathon Oil Corporation (NYSE:MRO) which engages in the exploration and production of oil and gas in the United States and internationally. Oil stocks are highly cyclical and volatile investment options but are also known for being lucrative investments during inflationary economic periods.
This February, Marathon Oil Corporation (NYSE:MRO) released its earnings report for the fiscal fourth quarter of 2021 in which it beat both EPS and revenue estimates. The company reported earnings per share of $0.77 and beat expert estimates by $0.21. Moreover, the company generated quarterly revenues of $1.80 billion, up 116.87% year over year, and outperformed market consensus by $255.76 million. On top of this, as of April 18, 2022, the stock has gained 64.19% over the past six months.
On April 11, Truist analyst Neal Dingmann raised his price target on Marathon Oil Corporation (NYSE:MRO) to $34 from $30 and maintained a Buy rating on the shares. The analyst expects “strong share buybacks” from the company after having talks with the management. Moreover, Mr. Dingmann commented that Marathon Oil Corporation (NYSE:MRO) has a headstart on its rivals and has more than adequate inventory to continue its strategic maintenance.
Elite hedge funds and analysts are bullish on Marathon Oil Corporation (NYSE:MRO). Insider Monkey identified 40 hedge funds that held long positions in the stock at the close of Q4 2021. The total stakes of these funds equaled more than $969 million, up from $903.2 million in the preceding quarter with 40 positions. As of December 31, 2021, Holocene Advisors is the leading stakeholder in Marathon Oil Corporation (NYSE:MRO), having stakes of over $153.9 million in the company.
7. Caterpillar Inc. (NYSE:CAT)
Number of Hedge Fund Holders: 53
Caterpillar Inc. (NYSE:CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines worldwide. It is one of the largest construction materials and equipment companies in the world. This March, Wells Fargo analyst Seth Weber initiated coverage of Caterpillar Inc. (NYSE:CAT) with an Equal Weight rating and a $231 price target. As businesses expand their operations, the demand for construction materials and equipment is bound to skyrocket, making Caterpillar Inc. (NYSE:CAT) a top cyclical stock to invest in for inflation.
On January 28, 2022, Caterpillar Inc. (NYSE:CAT) released its earnings for the fiscal fourth quarter of 2021 in which the company beat EPS by $0.43. Caterpillar Inc. (NYSE:CAT) reported earnings per share of $2.69 and generated revenues of $13.80 billion, up 22.81% year over year, beating revenue estimates by $558.88 million. As of March 31, 2022, the stock has gained 14.66% over the past six months.
According to Insider Monkey’s database, Caterpillar Inc. (NYSE:CAT) was on 53 elite hedge fund portfolios at the end of the fourth quarter of 2021. The total stakes of these funds in the company were more than $4.99 billion, up from $4.77 billion in the third quarter of 2021 with 46 positions. The hedge fund sentiment for Caterpillar Inc. (NYSE:CAT) is positive.
Bill & Melinda Gates Foundation Trust is the largest stakeholder in Caterpillar Inc. (NYSE:CAT) as of March 30, 2022. The fund’s stakes in the company are worth more than $2.0 billion, which represents 8.71% of the fund’s Q4 2021 investment portfolio.
Caterpillar Inc. (NYSE:CAT) is a go-to cyclical stock that hedge funds are buying to benefit from inflation. Other stocks popular among analysts and investor circles include The Home Depot, Inc. (NYSE:HD), Exxon Mobil Corporation (NYSE:XOM), and Bank of America Corporation (NYSE:BAC).
6. Ford Motor Company (NYSE:F)
Number of Hedge Fund Holders: 53
Ford Motor Company (NYSE:F) designs, manufactures, markets, and services a range of trucks, cars, sport utility vehicles, electrified vehicles, and Lincoln luxury vehicles worldwide. This January, JPMorgan analyst Ryan Brinkman raised his price target on Ford Motor Company (NYSE:F) to $23 from $20 while maintaining an Overweight rating on the shares.
Investors and analysts are equally bullish on Ford Motor Company (NYSE:F) as the company is set on a path to making half of its vehicles all-electric by 2030. The company is set to benefit from tax incentives announced by the Biden administration for EV makers as part of the government’s plans to go green. As the economy booms, Ford Motor Company (NYSE:F) can benefit from rising prices which can be passed on to consumers with its top-of-the-line vehicles.
On March 14, Ford Motor Company (NYSE:F) announced that it will be offering a new generation of seven, all-electric, fully-connected passenger vehicles and vans in Europe by 2024. Ford Motor Company (NYSE:F) expects its annual sales of EVs in Europe to exceed 600,000 units by 2026 and aims to deliver a 6% return on sales in Europe in 2023.
According to Insider Monkey’s database, 53 hedge funds were bullish on Ford Motor Company (NYSE:F) by the end of the fourth quarter of 2021. The total stakes of these funds came to $1.7 billion, up from $1.64 billion in the preceding quarter with 51 positions. The hedge fund sentiment for the stock is positive, and as of March 31, 2022, Ford Motor Company (NYSE:F) has gained 19.42% over the past six months.
As of March 23, 2022, D E Shaw is the dominating shareholder in Ford Motor Company (NYSE:F), having stakes of more than $590 million in the automaker. The investment covers 0.48% of the fund’s 13F portfolio.
5. Freeport-McMoRan Inc. (NYSE:FCX)
Number of Hedge Fund Holders: 66
Soaring commodity prices are an indicator of the start of a global economic expansion cycle, hence proving to be a critical point for investors to benefit from cyclical stocks. Freeport-McMoRan Inc. (NYSE:FCX) engages in the mining of mineral properties in North America, South America, and Indonesia. The company explores copper, gold, molybdenum, silver, and other metals, along with oil and gas. On March 24, 2022, Jefferies analyst Christopher LaFemina upped his price target on Freeport-McMoRan Inc. (NYSE:FCX) to $65 from $58 and reiterated a Buy rating on the shares.
This January, Freeport-McMoRan Inc. (NYSE:FCX) released its earnings report for the fiscal fourth quarter of 2021. The company reported earnings per share of $0.96, beating market consensus by $0.02. The company’s revenue for the quarter saw an increase of 37.13% year over year, from $4.50 billion in 2020 to $6.16 billion in 2021. Moreover, the stock has gained 51.46% over the past six months as of March 31, 2022.
Out of the 924 elite hedge funds being tracked by Insider Monkey, 66 held stakes in Freeport-McMoran Inc. (NYSE:FCX) at the close of the fourth quarter of 2021. The total value of these stakes was roughly equal to $3.77 billion. This is compared to 66 positions in the third quarter of 2021 with stakes worth $3.21 billion. The investor sentiment for the stock is positive.
As of the fourth quarter of 2021, Fisher Asset Management is the top stakeholder in the company. The fund’s stakes in Freeport-McMoran Inc. (NYSE:FCX) were estimated to value at $2.03 billion, which represents 1.14% of Fisher Asset Management’s Q4 2021investment portfolio.
4. The Home Depot, Inc. (NYSE:HD)
Number of Hedge Fund Holders: 68
The Home Depot, Inc. (NYSE:HD) operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, lawn and garden products, and décor products. The stock offers a forward dividend yield of above 2.0% and is also relatively undervalued, making it stand among the top cyclical stocks for inflation. Moreover, The Home Depot, Inc. (NYSE:HD) has a cyclical business model which enables it to transfer high costs to consumers in the form of price hikes.
This January, Truist analyst Scot Ciccarelli assumed coverage and upgraded The Home Depot, Inc. (NYSE:HD) to Buy from Hold with a price target of $448, up from $420. The analyst sees upside to stock, citing key home improvement growth drivers being supply and demand imbalances in the housing market, behavioral changes due to the pandemic, and aging housing infrastructure. The analyst further told investors that he sees the stock gaining more market share as we progress into 2022 from its size and scale benefits and enhanced supply chain capabilities.
This February, The Home Depot, Inc. (NYSE:HD) released its earnings report for the fiscal fourth quarter of 2021 in which the company beat both EPS and revenue estimates. The company registered an EPS of $3.21, beating expert estimates by $0.03. Moreover, the company reported quarterly revenues of $35.72 billion, up 10.72% year over year, and outperformed market consensus by $873.49 million.
On February 22, 2022, The Home Depot, Inc. (NYSE:HD) announced that its board of directors increase its quarterly dividend by 15% to $1.90 per share, which brings the company’s annual dividend to $7.60 per share. The dividend was payable on March 24 to investors of record on March 10.
By the end of the fourth quarter of 2021, Insider Monkey spotted The Home Depot, Inc. (NYSE:HD) on 68 hedge fund portfolios, which had total stakes of $6.08 billion in the company. This is compared to 58 positions in the preceding quarter with stakes worth $4.38 billion. The hedge fund sentiment for the stock is positive.
Ken Fisher’s Fisher Asset Management is the dominating shareholder in The Home Depot, Inc. (NYSE:HD), as of December 31, 2021, owning over 7 million shares of the stock. According to Insider Monkey’s data, Fisher Asset Management’s stakes in the company stand at $3.2 billion as of the end of last December.
ClearBridge Investments, an investment management firm, published its first-quarter 2022 investor letter in which it mentioned The Home Depot, Inc. (NYSE:HD). Here is what the firm had to say:
“Other actions during the quarter included the sale of consumer name Home Depot (NYSE:HD). The Home Depot move is based on where we are in the consumer and housing cycle as we come out of a period of nesting and dedensification and as government stimulus related to COVID-19 expires. The company has effectively pulled forward demand over the last two years and taken share because of in-stock inventory availability relative to peers. Many of those tailwinds are now turning neutral to negative and our thesis for Home Depot of optimizing the business in terms of merchandising/inventory, omnichannel, PRO/DIY mix, labor and distribution centers has played out. The exit is part of our efforts to reduce consumer discretionary exposure and provide better downside protection if volatility persists.”
3. Exxon Mobil Corporation (NYSE:XOM)
Number of Hedge Fund Holders: 71
This February, Exxon Mobil Corporation (NYSE:XOM) released earnings for the fiscal fourth quarter of 2021 in which the company beat on both EPS and revenue. The company reported earnings per share of $2.05, outperforming market consensus by $0.11. The company’s revenue grew by 82.56% for the quarter, and came to $84.97 billion, beating revenue estimates by $6.24 billion. As of March 31, 2022, Exxon Mobil Corporation (NYSE:XOM) has gained 35.55% over the past six months. Even though economies are setting decade-long targets on achieving net-zero carbon emissions and going green, crude oil will maintain its stronghold on economies and oil stocks are bound to benefit from price hikes and economic expansions.
Soaring crude oil prices as a consequence of global economic expansion is inviting bullish trends for the energy sector from investors. Exxon Mobil Corporation (NYSE:XOM) is attracting elite hedge funds and analysts alike. On March 9, 2022, Barclays analyst Jeanine Wai raised her price target on Exxon Mobil Corporation (NYSE:XOM) to $98 from $91 and reiterated an Overweight rating on the shares. By the end of the fourth quarter of 2021, 71 hedge funds held stakes in the company worth more than $5.38 billion. This is compared to 64 positions in the previous quarter, with stakes amounting to $4.64 billion. The hedge fund sentiment for the stock is positive.
As of December 31, 2021, GQG Partners is the most prominent shareholder in Exxon Mobil Corporation (NYSE:XOM). The fund’s stakes in the company amounted to $1.98 billion, a 22% increase from the fund’s previous stakes of $1.56 billion. The investment covers 4.91% of GQG Partners’ 13F portfolio.
Saturna Capital mentioned Exxon Mobil Corporation (NYSE:XOM) in its fourth-quarter 2021 investor letter, here’s what the firm had to say:
“Few companies maintain their position at the top for more than a decade or two. One that did was Exxon, which appeared decennially from 1980 through 2010. In 2019 it was ranked 10th, but as of writing has dropped to 39th place.”
2. Bank of America Corporation (NYSE:BAC)
Number of Hedge Fund Holders: 84
Banking stocks are cyclical in nature and tend to soar with interest rate spikes and surging inflation. Bank of America Corporation (NYSE:BAC) provides banking and financial products and services for individual consumers, small and middle-market businesses, institutional investors, large corporations, and governments worldwide. This March, Baird analyst David George upgraded Bank of America Corporation (NYSE:BAC) to Neutral from Underperform and reiterated his price target of $42 on the shares.
By the end of the fourth quarter of 2021, 84 hedge funds held stakes in Bank of America Corporation (NYSE:BAC) which were worth more than $47.87 billion. This is compared to 72 identified positions in the preceding quarter, with stakes worth $46.46 billion. Based on these numbers, we can conclude that the hedge fund sentiment for the stock is positive.
On January 29, Bank of America Corporation (NYSE:BAC) announced that its earnings per share for the fiscal fourth quarter of 2021 were $0.82, and it outperformed market consensus by $0.06. The company reported quarterly revenues of $22.06 billion, up 9.14% year over year from $20.21 billion. As of March 31, 2022, Bank of America Corporation (NYSE:BAC) has gained 4.38% over the past twelve months.
As of the end of last December, Berkshire Hathaway is the most prominent shareholder in Bank of America Corporation (NYSE:BAC). According to Insider Monkey’s data, the Warren Buffett-led hedge fund’s stakes in the company were valued at a whopping $44.93 billion, which accounts for 13.57% of Berkshire Hathaway’s 13F portfolio.
Here is Oakmark Funds’ stance on the Bank of America Corporation (NYSE:BAC) in the firm’s third-quarter 2021 investor letter:
“Earlier this year, one of our holdings, Bank of America Corporation (NYSE:BAC), announced that it was raising its minimum hourly wage from $15 to $20 and would increase it to $25 by 2025. The company received great press for placing the well-being of its employees above profits. But was it really either/or? Bank of America’s chief human resources officer spoke to the bigger picture: “A core tenet of responsible growth is our commitment to being a great place to work…that includes providing strong pay and competitive benefits to help them and their families, so that we continue to attract and retain the best talent.” Bank of America understood that engaged, high-caliber employees are more productive, less prone to turnover and, therefore, less expensive in the long run. Increasing the pay for employees wasn’t elevating employees above shareholders; it was the right thing to do for employees and for shareholders.
If an increase to $20 was good, why stop there? Why not $50 per hour? Because the benefits the business receives at $50 don’t justify the expense. The bank would no longer be able to price its products competitively and would lose business. The employees would “win” in the short term, but eventually the lost business would lead to job cuts, meaning both employees and shareholders would lose. The negative effects of stakeholder overreach are no different than when CEOs overreach to inflate short-term profits. Both hurt shareholders and stakeholders.”
1. JPMorgan Chase & Co. (NYSE:JPM)
Number of Hedge Fund Holders: 107
Topping our list of best cyclical stocks for inflation is JPMorgan Chase & Co. (NYSE:JPM), the largest bank in the U.S. with a balance sheet of $2.87 trillion as of 2022. The company operates through four segments: Consumer & Community Banking, Corporate & Investment Banking, Commercial Banking, and Asset & Wealth Management. With the fed increasing interest rates, cyclical banking stocks such as JPMorgan Chase & Co. (NYSE:JPM) are lucrative investment options to consider.
This April, JPMorgan Chase & Co. (NYSE:JPM) reported earnings for the fiscal first quarter of 2022 in which it beat revenue estimates by $318.5 million. The company reported earnings per share of $2.63 and generated quarterly revenues of $30.72 billion. On April 14, Piper Sandler analyst Jeffery Harte raised his price target on JPMorgan Chase & Co. (NYSE:JPM) to $170 from $165 and maintained an Overweight rating on the shares.
By the end of the fourth quarter of 2021, 107 hedge funds were long JPMorgan Chase & Co. (NYSE:JPM). The total stakes of these hedge funds amounted to $6.58 billion, up from $5.63 billion in the preceding quarter with 101 positions. The investor sentiment for the stock is positive.
As of December 31, 2021, Fisher Asset Management is the leading stakeholder in JPMorgan Chase & Co. (NYSE:JPM) owning over 7 million shares of the stock. The total stakes of Ken Fisher’s hedge fund in the financial services company stand at $1.17 billion, which covers 0.65% of Fisher Asset Management’s 13F portfolio.
ClearBridge Investments has explained why investors should remain optimistic about their stakes in JPMorgan Chase & Co. (NYSE:JPM) in its fourth-quarter 2021 investor letter:
“Our energy and financials holdings kept pace in the 2021 rally. In financials, JPMorgan benefited from strong economic growth, a rise in Treasury yields, and a benign credit environment.”
You can also take a look at 10 Best Inflation-Proof Stocks and 10 Stocks That are Benefiting From Rising Inflation.
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Disclosure. None. 10 Best Cyclical Stocks For Inflation is originally published on Insider Monkey.
