In this article, we discuss 5 best cyclical stocks for inflation. If you want to read more about cyclical stocks and their performance during different economic cycles, you can go directly to 10 Best Cyclical Stocks for Inflation.
5. Marathon Oil Corporation (NYSE:MRO)
Number of Hedge Fund Holders: 43
Marathon Oil Corporation (NYSE:MRO) is an American oil and gas company headquartered in Houston, Texas. Oil companies might be susceptible to market volatility. However, 79% of the total energy is derived from fossil fuels in the US and more in emerging markets. Furthermore, the free cash flow breakeven of the company is at $35 WTI, while currently, crude oil is trading at nearly $110 WTI.
Marathon Oil Corporation (NYSE:MRO)’s cash distribution to its shareholders is subjected to its cash flows. The company has pledged to return a minimum of 40% of its total cash flow to investors. According to the company’s Q1 financial reports, Marathon Oil Corporation (NYSE:MRO) has returned 80% of its free cash flow to investors through dividends and share repurchases. At the time of writing, the company has a 1.46% dividend yield and an annual dividend rate of $0.32 per share.
On June 14, Barclays analyst Jeanine Wai raised the price of oil and gas exploration companies by an average of 18%. The analyst maintained an Overweight rating on Marathon Oil Corporation (NYSE:MRO) shares after raising the price target to $37 from $30.
Here is what Carillon Tower Advisers had to say about Marathon Oil Corporation (NYSE:MRO) n its Q1 2022 investor letter:
“Stock selection contributed the most while sector allocation was also positive. An underweight to communication services and an overweight to energy helped performance, while an underweight to consumer staples and an overweight to materials detracted. Stock selection was strong within healthcare and materials but was weak within information technology and industrials. Marathon Oil (NYSE:MRO) increased its quarterly dividend and executed an impressive share buyback that blew by the target it originally announced.”
4. Ulta Beauty, Inc. (NASDAQ:ULTA)
Number of Hedge Fund Holders: 48
Ulta Beauty, Inc. (NASDAQ:ULTA) is a US-based retailer of beauty products. The specialty retail industry is highly cyclical. However, the company has the power to pass on its rising costs due to inflation to its customers. Brand loyalty is another factor that helps Ulta Beauty, Inc. (NASDAQ:ULTA) curb current inflation effects. The Ultamate Rewards Loyalty Program has over 37 million members, responsible for 95% of the company’s total sales.
According to our database, 48 hedge funds were bullish on Ulta Beauty, Inc. (NASDAQ:ULTA) in Q1 2022, while the number was down at 37 in the previous quarter. Arrowstreet Capital was the largest shareholder in the company in Q1 of 2022, with 503,580 shares worth $200.5 million.
On June 29, Raymond James analyst Olivia Tong raised her price target on Ulta Beauty, Inc. (NASDAQ:ULTA) to $485 from $475 and upgraded the company shares to a Strong Buy rating from Outperform. The analyst believes that the company is “particularly well-positioned” in the current inflationary situation as 40% of Ulta Beauty, Inc. (NASDAQ:ULTA)’s loyal customer base has a household income of more than $100,000. She added that the company is well-positioned if the economy falls into a recession.
Here is what ClearBridge investments had to say about Ulta Beauty, Inc. (NASDAQ:ULTA) in its Q4 2021 investor letter:
“Several encouraging macro trends are emerging in support of two areas outside tech: consumer spending and industrial production. Unlike in past recessions and recoveries, consumer balance sheets have actually improved dramatically since the onset of the pandemic. This should feed through to increased spending on discretionary items offered by retailers like Ulta Beauty. We expect the supply chain constraints contributing to inflation and goods shortages will begin to lessen with an ambitious rebuilding of inventories.”
3. KLA Corporation (NASDAQ:KLAC)
Number of Hedge Fund Holders: 52
KLA Corporation (NASDAQ:KLAC) is a California-based Semiconductor Equipment & Materials company that provides process control and yield management systems to semiconductor and nanotechnology companies. Our database shows that 52 hedge funds had stakes in the company in the first quarter of 2022. Alkeon Capital Management held the highest stake. Moreover, the second most significant shareholder, D E Shaw, increased its holding in the company by a staggering 481% in the same quarter.
Despite the downward trend in the semiconductor market, KLA Corporation (NASDAQ:KLAC) remains on our list due to its free cash flow returns, high profitability in the semiconductor equipment industry, and a strong balance sheet with healthy fiscal reports. The FQ3 2022 reports of the company recorded a 27% YoY revenue growth to $2.29 billion compared to the $2.20 billion estimates. Furthermore, KLA Corporation (NASDAQ:KLAC)’s revenue has grown at a compound annual growth rate of 12% since 2012. The company also surpassed its EPS estimates of $4.82 by 6.33%.
Vltava Fund discussed KLA Corporation (NASDAQ:KLAC) in its first-quarter 2022 investor letter. Here is what the fund said:
“We then used the money freed up to, among other things, open three new positions. The stock price declines during the Russian invasion brought a lot of good prices to the market. Out of all the possibilities we considered, we picked the stock of KLA Corporation (KLAC).
KLA Corporation develops leading-edge equipment and services that enable innovation throughout the electronics industry. It specialises in process management and control in semiconductor manufacturing and the related nanoelectronics industries. During manufacturing processes, products must be inspected for defects and correct critical dimensions in order to identify and eliminate possible sources of problems. As customers continue to enforce Moore’s Law, smaller chips must meet more precise specifications, which in turn increases the need for advanced inspection and diagnostic tools. This is a key step within the entire manufacturing process and one in which the company has built a very strong, and in places dominant, global position. We have been watching and waiting for an opportunity to acquire this stock for some time already, and this year’s drop in its price finally prompted us to buy.”
2. Pioneer Natural Resources Company (NYSE:PXD)
Number of Hedge Fund Holders: 54
Pioneer Natural Resources Company (NYSE:PXD) is a Texas-based hydrocarbon exploration company. The company operates in Cline Shale in the Permian Basin. On June 14, Barclays analyst Jeanine Wai maintained an Overweight rating on Pioneer Natural Resources Company (NYSE:PXD)’s shares after raising the price target to $339 from $302.
Pioneer Natural Resources Company (NYSE:PXD)’s share repurchase program was worth $250 million in the first quarter of 2022. The annualized sum shows a 1.8% return through buybacks. Furthermore, a special quarterly dividend of $7.38 was declared on May 4, with $0.78 as a base dividend and $6.60 as a variable. The dividend was paid out on June 14, 2022. The combined dividend amount of $1.9 billion shows that the company returned 83% of its free cash flow to its shareholders. In conclusion, the share buyback program and dividends drive the total shareholder yield close to 15%, one of the highest in the S&P 500 index.
Among the hedge funds tracked by Insider Monkey, 54 hedge funds were bullish on Pioneer Natural Resources Company (NYSE:PXD), compared to 43 in the previous quarter. Abrams Bison Investments was the most significant stakeholder in Q1 2022, with a total stake value of $149.5 million. The firm had also increased its holdings in the company by 12.67% in Q1 2022.
Here is what ClearBridge Investments had to say about Pioneer Natural Resources Company (NYSE:PXD) in its first-quarter 2022 investor letter:
“Our underweight to the energy sector weighed on performance, as energy prices skyrocketed from inflationary pressures and the threat of reduced supply. We have a limited footprint within the sector but continue to look for companies that will generate strong, long-term returns such as Pioneer Natural Resources. Pioneer is an oil and gas exploration and production company that offers a combination of a strong asset base, quality balance sheet and compelling free cash flow yield at current commodity prices. We believe Pioneer has strong underlying drivers that will generate attractive risk-adjusted returns beyond shorter-term fluctuations in energy prices.”
1. Exxon Mobil Corporation (NYSE:XOM)
Number of Hedge Fund Holders: 83
Exxon Mobil Corporation (NYSE:XOM) is one of America’s biggest oil and gas companies. As of 2022, the company ranks 6th among the Fortune 500 companies. Exxon Mobil Corporation (NYSE:XOM) has paid and increased its dividends to its investors for the past 39 years, even during the steep decline of oil prices in 2014 and later in 2019. The company has a high dividend yield of about 4%, with an annual payout of $3.52. The latest quarterly dividend payment of $0.88 per share was made on June 10.
On June 7, Evercore ISI analyst Stephen Richardson upgraded Exxon Mobil Corporation (NYSE:XOM)’s shares from In-Line to Outperform and increased the price target from $88 to $120.
One more reason to put Exxon Mobil Corporation (NYSE:XOM) on the list is its plan to expand its carbon capture and storage program. The company has announced four new carbon capture and storage projects in the last two weeks of June alone.
Saturna Capital mentioned Exxon Mobil Corporation (NYSE:XOM) in its fourth-quarter 2021 investor letter. Here is what the firm said:
“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.”
You can also take a look at The 10 Best Stocks to Buy in 2022 According to Billionaire Richard Chilton and The 10 Best Stocks to Buy Now According to Michael Platt’s BlueCrest Capital.
