15 Undervalued Cyclical Stocks to Buy Now

Published on August 27, 2023 at 8:48 am by Ramish Cheema in News, Quantitative Investing

In this piece, we will take a look at 15 undervalued cyclical stocks to buy now according to Wall Street analysts. If you want to skip our primer of cyclical stocks and the economy in general, then skip ahead to 5 Undervalued Cyclical Stocks To Buy Now.

Stocks are divided into several categories and these primarily segregate them on the basis of industry. However, two categories classify stocks according to economic conditions. These are discretionary or cyclical stocks, and defensive stocks.

These two categories list down companies whose fortunes either rise with the income that consumers have to spend or their ability to withstand economic slowdowns and resist a drop in purchasing power. Cyclical stocks are those that tend to do well when the economy is doing well and people have more money to spend. These generally include luxury goods companies such as jewelers, airlines, and restaurants. The logic goes that as people see their incomes rise in a growing economy and inflation remains low, they have more money to spend on luxury and naturally, cyclical stocks go up as a result.

The other category, namely consumer defensive stocks, are those that are deemed too essential for daily living for people to skip out on even if the economy is slowing down. The rather cynical take surrounding them is that people cannot afford to skip out on buying essentials such as food and medicines even if their income is dropping. Naturally, this leads to defensive stocks being better off in share price performance in an era of slow economic growth. One of the most notable examples of a consumer defensive stock is Walmart Inc. (NYSE:WMT), whose low cost business model tends to attract consumers when their incomes drop.

Today’s high interest rate environment is one that is designed to benefit defensive stocks when we take an intuitive approach. After all, high rates slow down the economy and lead to poorer economic outcomes for most people. Yet, the current turmoil in the U.S. economy is rather historic in nature. 2022 was one of the worst years for the American consumer as high inflation, due to factors such as the $5 a gallon price for gasoline, squeezed consumer budgets dry. This left them with less discretionary income to make purchases and created a slow economic environment as purchases were instead redirected to essentials.

But 2023 is proving to be a different economic landscape. Inflation in the U.S. currently sits at 3.2% which is significantly lower than the peak reading of 9.1% in June 2022. This drop in inflation frees up more money that people have to spend on luxury, and combined with the fact that the economy continues to grow, it can provide some stimulus to cyclical stocks despite the multi decade high interest rates right now. As any seasoned investor would tell you, investing is more about future expectations instead of current trends, as markets often react to potential future developments. As an example, it’s a sure bet that the S&P 500 will fall should the Federal Reserve’s Chairman Jerome Powell surprise investors and share that the bank will raise interest rates throughout 2024 due to unforeseen circumstances.

So, the next question to ask is what are the tea leaves saying for consumer cyclical stocks? Well, one way to judge consumer confidence is by taking a look at The Conference Board’s consumer confidence survey. This survey measures consumer sentiment and the latest results were released in late July. They show that the index rose to 117 in July for a second consecutive month of gains and its highest reading since July 2021. Consumers were also quite confident about near term economic expectations, as the Expectations Index grew to 88.3 from the previous month’s 80. 80 is a crucial reading for the expectations index since any reading below it reflects an incoming recession. Another crucial index is the University of Michigan’s consumer surveys. The latest data set for August shows that consumer sentiment stood at its second highest level in 21 months and 39% higher than the lowest value in history that it had touched in June 2022 – when inflation was at its highest.

With these details in mind, we decided to take a look at which undervalued consumer cyclical stocks are being favored by analysts. Some top picks are Burlington Stores, Inc. (NYSE:BURL), Cavco Industries, Inc. (NASDAQ:CVCO), and Ulta Beauty, Inc. (NASDAQ:ULTA).

Susan Law Cain / Shutterstock.com

Our Methodology

To compile our list of undervalued cyclical stocks to buy according to Wall Street analysts, we selected the top 15 stocks with the greatest percentage difference between their share price and average analyst price targets that have been rated Buy or higher.

15 Undervalued Cyclical Stocks To Buy Now

15. McDonald’s Corporation (NYSE:MCD)

Latest Share Price Upside: 15%

Analyst Average Share Price Target: $328

McDonald’s Corporation (NYSE:MCD) is one of the largest fast food retailers in the world. High inflation and consumer strength have both helped the firm beat analyst EPS estimates in all four of its latest quarters.

During this year’s second quarter, 68 out of the 910 hedge funds part of Insider Monkey’s database had bought McDonald’s Corporation (NYSE:MCD)’s shares. Out of these, the firm’s largest shareholder is Ken Griffin’s Citadel Investment Group since it holds a $777 million stake.

Along with Burlington Stores, Inc. (NYSE:BURL), Cavco Industries, Inc. (NASDAQ:CVCO), and Ulta Beauty, Inc. (NASDAQ:ULTA), McDonald’s Corporation (NYSE:MCD) is an undervalued cyclical stock to buy.

14. Chipotle Mexican Grill, Inc. (NYSE:CMG)

Latest Share Price Upside: 16%

Analyst Average Share Price Target: $2,168

Chipotle Mexican Grill, Inc. (NYSE:CMG) is another restaurant that offers Mexican cuisine. Its shares are rated Strong Buy on average, and analysts have penned in a 16% share price upside based on the average share price target.

By the end of June 2023, 55 out of the 910 hedge funds polled by Insider Monkey had held a stake in the firm. Chipotle Mexican Grill, Inc. (NYSE:CMG)’s biggest hedge fund investor is Bill Ackman’s Pershing Square since it owns 953,608 shares that are worth $2 billion.

13. Deckers Outdoor Corporation (NYSE:DECK)

Latest Share Price Upside: 18%

Analyst Average Share Price Target: $616

Deckers Outdoor Corporation (NYSE:DECK) is an apparel company. According to the investment management firm The London Company, the firm has a strong balance sheet and its management has performed well by diversifying its brands and promoting non seasonal products.

Insider Monkey’s second quarter of 2023 survey covering 910 hedge funds revealed that 47 had bought Deckers Outdoor Corporation (NYSE:DECK)’s shares. Robert Pitts’ Steadfast Capital Management is the largest shareholder among these since it owns $218 million worth of shares.

12. Lithia Motors, Inc. (NYSE:LAD)

Latest Share Price Upside: 19%

Analyst Average Share Price Target: $358

Lithia Motors, Inc. (NYSE:LAD) is a car retailer with a presence in the U.S. and Canada. A weakening economy has affected its operations as well since the firm has missed analyst EPS estimates in three of its four latest quarters.

After digging through 910 hedge fund portfolios to look at their investments during this year’s second quarter, Insider Monkey discovered that 33 had invested in the company. Lithia Motors, Inc. (NYSE:LAD)’s biggest hedge fund stakeholder is David Abrams’ Abrams Capital Management through an investment worth $714 million.

11. Asbury Automotive Group, Inc. (NYSE:ABG)

Latest Share Price Upside: 19%

Analyst Average Share Price Target: $260

Asbury Automotive Group, Inc. (NYSE:ABG) is another car detailer. The firm’s second quarter saw it report double digit drops in used vehicle sales and unit shipments.

Insider Monkey’s Q2 2023 survey of 910 hedge funds revealed that 27 had held a stake in Asbury Automotive Group, Inc. (NYSE:ABG). Out of these, David Abrams’ Abrams Capital Management is the company’s largest shareholder due to its $506 million stake.

10. Lear Corporation (NYSE:LEA)

Latest Share Price Upside: 21%

Analyst Average Share Price Target: $170

Lear Corporation (NYSE:LEA) is a car parts manufacturer and seller that provides car companies with products such as seats and wire harnesses. The firm’s average share price target is $170 helped no doubt by the strong demand for electric vehicles that should help it now and in the future.

As of June 2023, 26 out of the 910 hedge funds part of Insider Monkey’s research had invested in the company. Lear Corporation (NYSE:LEA)’s biggest hedge fund investor is Richard S. Pzena’s Pzena Investment Management since it owns 6.5 million shares that are worth $944 million.

Cavco Industries, Inc. (NASDAQ:CVCO), Lear Corporation (NYSE:LEA), Burlington Stores, Inc. (NYSE:BURL), and Ulta Beauty, Inc. (NASDAQ:ULTA) are some top undervalued cyclical stocks.

9. Five Below, Inc. (NASDAQ:FIVE)

Latest Share Price Upside: 25%

Analyst Average Share Price Target: $221

Five Below, Inc. (NASDAQ:FIVE) is an American retailer that sells a wide variety of products such as clothes and consumer electronics. The firm is slated to report its second quarter earnings by the end of August and analysts have penned in 83 cents in earnings per share.

By the end of this year’s second quarter, 37 out of the 910 funds polled by Insider Monkey had held Five Below, Inc. (NASDAQ:FIVE)’s shares. Francois Rochon’s Giverny Capital is the company’s largest stakeholder, through its $124 million investment.

8. Visteon Corporation (NASDAQ:VC)

Latest Share Price Upside: 26%

Analyst Average Share Price Target: $171

Visteon Corporation (NASDAQ:VC) is a car parts manufacturer that sells products used in vehicle connectivity. The firm’s second quarter earnings saw it report a profit drop due to growing costs but it did grow revenue by launching new products.

Insider Monkey took a look at 910 hedge fund holdings for 2023’s second quarter to find 32 investors in the company. Out of these, Visteon Corporation (NASDAQ:VC)’s biggest investor is Richard Driehaus’s Driehaus Capital through a stake worth $49.7 million.

7. Group 1 Automotive, Inc. (NYSE:GPI)

Latest Share Price Upside: 27%

Analyst Average Share Price Target: $327

Group 1 Automotive, Inc. (NYSE:GPI) is a car retailer. After a strong performance by the used car market this year, the firm beat its analyst EPS estimates for its latest quarter, adding to three consecutive quarters of beats.

During this year’s June quarter, 31 of the 910 hedge funds surveyed by Insider Monkey had bought a stake in Group 1 Automotive, Inc. (NYSE:GPI). Anthony Bozza’s Lakewood Capital Management is the largest stakeholder out of these since it owns $83 million worth of shares.

6. Amazon.com, Inc. (NASDAQ:AMZN)

Latest Share Price Upside: 27%

Analyst Average Share Price Target: $169

Amazon.com, Inc. (NASDAQ:AMZN) is a mega cap stock known for its electronic commerce platform and cloud computing division. Its shares are rated Strong Buy on average and the firm is racing to put its internet satellites into orbit.

278 out of the 910 hedge funds part of Insider Monkey’s Q2 2023 database have invested in the firm. Amazon.com, Inc. (NASDAQ:AMZN)’s biggest hedge fund shareholder is Ken Fisher’s Fisher Asset Management since it owns 40.6 million shares that are worth $5.3 billion.

Burlington Stores, Inc. (NYSE:BURL), Amazon.com, Inc. (NASDAQ:AMZN), Cavco Industries, Inc. (NASDAQ:CVCO), and Ulta Beauty, Inc. (NASDAQ:ULTA) are undervalued cyclical stocks with Buy ratings and high hedge fund investors.

Click to continue reading and see 5 Undervalued Cyclical Stocks To Buy Now

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