In this article, we discuss 11 best cyclical stocks to buy now.
JPMorgan analysts, who have been staunch equity bulls for most of the year, believe that a soft landing is a plausible scenario for the global economy, and this will provide positive catalysts for risky assets. Marko Kolanovic and Nikolaos Panigirtzoglou of JPMorgan said in mid-September that latest data highlights abating inflation and employment pressures, recovery in economic growth, and a rebound in consumer confidence. These factors lead the analysts to believe that a global recession can be avoided. The analysts stated:
“Economic data and investor positioning are more important factors for risky asset performance than central bank rhetoric. We maintain a pro-risk stance.”
JPMorgan further noted that a measured easing in inflation will be an optimistic catalyst for cyclical stocks and small-cap companies. The investment firm favors cyclicals and small-caps, as well as emerging-market names and Chinese securities as compared to “expensive” defensive plays. JPMorgan is bullish on energy and commodities as well. Explaining its stance further, the firm reiterated:
“We maintain that inflation will resolve on its own as distortions fade and that the Fed has over-reacted with 75bps hike. We will likely see a Fed pivot, which is positive for cyclical assets.”
Some of the best cyclical stocks to buy now include General Motors Company (NYSE:GM), Boyd Gaming Corporation (NYSE:BYD), and Advance Auto Parts, Inc. (NYSE:AAP).
Our Methodology
We carried out an extensive assessment of cyclical industries, including restaurants, hotels, airlines, furniture, high-end fashion retailers, and automobile manufacturers. We selected the following stocks based on positive analyst coverage, resilient demand despite a difficult macro environment, and strong hedge fund sentiment.
We have arranged the list according to the hedge fund sentiment around the securities, which was assessed from Insider Monkey’s Q2 2022 database of about 900 elite hedge funds.
Image by Sergei Tokmakov Terms.Law from Pixabay
Best Cyclical Stocks to Buy Now
11. Sweetgreen, Inc. (NYSE:SG)
Number of Hedge Fund Holders: 15
Sweetgreen, Inc. (NYSE:SG) is a California-based operator of fast-casual restaurants serving healthy foods prepared from seasonal and organic ingredients. On September 13, Sweetgreen, Inc. announced that it will open its first restaurants in Indiana and Minnesota. This move will bolster Sweetgreen, Inc.’s Midwest presence.
On September 9, Cowen analyst Andrew Charles raised the price target on Sweetgreen, Inc. to $23 from $20 and maintained an Outperform rating on the shares. The analyst said he remains confident in Sweetgreen, Inc.’s path to profitability and the company’s goals to double its store outlets in 3 years to 330 locations and to 1,000 locations by 2030.
Among the hedge funds tracked by Insider Monkey, 15 funds reported owning stakes in Sweetgreen, Inc., up from 12 funds in the prior quarter. Kevin Michael Ulrich and Anthony Davis’ Anchorage Advisors is the leading position holder in the company, with 4.8 million shares worth $55.8 million.
In addition to General Motors Company, Boyd Gaming Corporation, and Advance Auto Parts, Inc., Sweetgreen, Inc. is one of the best cyclical stocks to buy now.
Here is what Baron Small Cap Fund has to say about Sweetgreen, Inc. in its Q4 2021 investor letter:
“This quarter we participated in the IPO of Sweetgreen. Sweetgreen is one of the fastest growing restaurant chains in the U.S. and sits at the intersection of health and wellness, plant-based food consumption, digital adoption, and purpose-driven brands. As of the third quarter of 2021, the company operated 140 restaurants in 13 states, with the goal of being as ubiquitous as traditional fast food.
Sweetgreen’s menu is designed to be a delicious, customizable, and convenient way to empower customers to make healthier choices for both lunch and dinner. They currently offer signature salads, warm bowls, and plates that are complemented by a seasonal menu that changes five times a year. Sourced from over 200 domestic food partners, Sweetgreen’s assortment of roughly 40 freshly prepared or cooked ingredients allows customers to create millions of unique, customized orders to accommodate almost any flavor profile or dietary preference and allows for high frequency of use. The company utilizes a multichannel approach with 68% of revenue via digital channels and 47% of revenue coming through their own App. This is one of the highest digital penetration rates among restaurant companies, which gives Sweetgreen a valuable data and customer relationship advantage relative to peers. Digital customers tend to come more often and spend 20% more on average. Also, this data helps assess market density and viable new store locations.
With just 140 restaurants in 13 states there is considerable whitespace for the company to expand and we believe the company can grow units at a 25% CAGR over the next five years as they enter new markets, densify existing regions, and introduce new restaurant formats such as drive-thru and pick-up only. Historically concentrated in large urban markets, Sweetgreen should benefit from a recovery in those markets as the effects of COVID recede, driving outsized same-store sales, and potentially over 40% revenue growth over the next two years. Sweetgreen has also been planning for future growth by intentionally building additional capacity in existing restaurants to handle more order volume without adding more costs or square footage. Unit economics are already strong with new restaurants expected to generate revenues of approximately $3 million, with a healthy restaurant-level profit margin of 18%-plus, and year two cash-on-cash returns of over 40%. (Click to read full text)
10. ChargePoint Holdings, Inc. (NYSE:CHPT)
Number of Hedge Fund Holders: 17
ChargePoint Holdings, Inc. (NYSE:CHPT) is a California-based company that provides electric vehicle charging networks and charging solutions in the United States and internationally. In Q2 2022, ChargePoint Holdings, Inc. reported revenue that was meaningfully ahead of estimates and reaffirmed guidance despite the tough macro environment. ChargePoint Holdings, Inc. is one of the best cyclical stocks to buy now.
On September 7, Credit Suisse analyst Maheep Mandloi assumed coverage of ChargePoint Holdings, Inc. with an Outperform rating and a $22 price target. The analyst is “positive on ChargePoint” as he thinks it has an advantageous capital-light growth model, first-mover advantage with integrated solutions, and an attractive valuation.
According to Insider Monkey’s data, 17 hedge funds were bullish on ChargePoint Holdings, Inc. at the end of June 2022, with collective stakes worth $22.8 million, compared to 16 funds in the earlier quarter worth $34.7 million.
9. Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL)
Number of Hedge Fund Holders: 18
Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) was incorporated in 1969 and is headquartered in Lebanon, Tennessee. The company develops and operates the Cracker Barrel Old Country Store concept in the United States, which comprises restaurants and decorative gift shops. Cracker Barrel Old Country Store, Inc. expects total revenue growth in fiscal 2023 between 7% and 8% compared to the prior year, versus a 3.3% growth consensus. The company projects opening 3 or 4 new Cracker Barrel units and 15 to 20 new Maple Street Biscuit Company units. It is one of the best cyclical stocks to buy now, considering the growth forecasts.
On September 28, Deutsche Bank analyst Brian Mullan raised the price target on Cracker Barrel Old Country Store, Inc. to $106 from $100 and kept a Hold rating on the shares after the fiscal Q4 results. While the quarter was a little challenged, Cracker Barrel Old Country Store, Inc. offered initial fiscal 2023 revenue guidance in the range of 7% to 8%, which compared favorably to the earlier consensus, the analyst wrote to investors in a research note.
According to Insider Monkey’s data, 18 hedge funds were long Cracker Barrel Old Country Store, Inc. at the end of June 2022, compared to 19 funds in the last quarter. Cliff Asness’ AQR Capital Management is the leading position holder in the company, with 370,840 shares worth $30.5 million.
8. DraftKings Inc. (NASDAQ:DKNG)
Number of Hedge Fund Holders: 27
DraftKings Inc. (NASDAQ:DKNG) is an American fantasy sports contest and sports betting company. On September 29, the firm was added as a new best long idea at Hedgeye, given that the company now seems to be making progress on repairing some of its issues and reclaiming lost market share. While the macro backdrop is negative for the sector, DraftKings Inc. seems to be on track to benefit from some secular tailwinds. It is one of the best cyclical stocks to invest in.
On September 14, Guggenheim analyst Curry Baker raised the price target on DraftKings Inc. to $34 from $31 and reiterated a Buy rating on the shares after the favorable week one outcomes in the NFL, resilient downloads, and comparatively better DAU performance based on third-party app data, the focus on cost control, and a more rational promotional environment.
Among the hedge funds tracked by Insider Monkey, 27 funds were bullish on DraftKings Inc. at the end of the second quarter of 2022, with combined stakes worth $682 million. Parag Vora’s HG Vora Capital Management is a significant stakeholder of the company, with 2.5 million shares valued at $29 million.
In its Q4 2021 investor letter, Baron Funds, an asset management firm, highlighted a few stocks and DraftKings Inc. was one of them. Here is what the fund said:
“Shares of DraftKings Inc. fell in the quarter, as stocks of online gaming companies were under pressure. Sports betting and i-gaming are rolling out with great fanfare and success across the country; however, investors seem concerned about competition and margins. Most participants are spending heavily on marketing and promotions, which is cutting into margins. We see this as a worthy investment in customer acquisition at a moment in time when revenues are just building. We continue to believe that online sports betting and gaming will be enormous industries, and that DraftKings will be a leading player. We think the business will have high margins as it matures. We believe we are underwriting the business conservatively and see much upside in the long term.”
7. Hasbro, Inc. (NASDAQ:HAS)
Number of Hedge Fund Holders: 30
Hasbro, Inc. (NASDAQ:HAS) is an American multinational conglomerate holding company, and its products include toys, puzzles, board games, sports equipment, and electronic games. Hasbro, Inc.’s prominent brands include Monopoly, Nerf, Playskool, My Little Pony, Transformers, Peppa Pig, PJ Masks, Power Rangers, Littlest Pet Shop, and Tonka.
On August 18, BofA analyst Jason Haas reinstated coverage of Hasbro with a Buy rating and a $96 price target. As per the analyst, Hasbro, Inc. has one of its top content lineups ahead with Black Panther this holiday season, and Ant-Man, Dungeons & Dragons, Guardians of the Galaxy, Spider-Man, Transformers, and Star Wars coming next year. The analyst forecasted toy spending to be resilient despite consumers broadly pulling back on other discretionary purchases.
According to Insider Monkey’s data, 30 hedge funds were bullish on Hasbro, Inc. at the end of Q2 2022, compared to 38 funds in the prior quarter. Connor Haley’s Alta Fox Capital Management is the leading position holder in the company, with 3.14 million shares worth over $257 million.
Like General Motors Company, Boyd Gaming Corporation, and Advance Auto Parts, Inc., elite hedge funds are monitoring Hasbro, Inc. in the current market environment.
Here is what ClearBridge Large Cap Growth ESG Strategy has to say about Hasbro, Inc. in its Q2 2022 investor letter:
“In addition to finding value in engaging on climate risks, net-zero targets and new technologies, we also add value to our investment process with engagements on a variety of governance topics. For example, we have long supported toy and game maker Hasbro’s management and board on strategic, operational and ESG-related topics; the company ranks highly on almost all areas of ESG evaluation, including diversity at board and all-employee levels. We maintain long-term relationships with Hasbro management, and in April 2022, after an activist shareholder started pushing for strategic change at the company, we stepped up our dialogue with senior management and the board.
While we appreciate some of the concerns raised by the activist, we were against most of its suggestions, which we believed would be destructive to long-term shareholder value. We did not believe it was in our best interest to replace three board members with activist-nominated board members – the existing board is replete with talent from the media, technology, content, gaming, entertainment and social media industries.
Over multiple meetings with Hasbro’s CEO and CFO and as many as three board members, our strong relationships helped us better understand what changes would be made where appropriate, and what strategies would remain intact. We had frequent opportunities to share our thoughts on board composition, long-term strategic priorities, compensation, capital allocation and disclosures. All of these became important topics for review during this time. In June 2022 the activist’s proposals were rejected by shareholders. We remain in support of management as it continues on its path of brand-building and growing digital content for its customers.”
6. Advance Auto Parts, Inc. (NYSE:AAP)
Number of Hedge Fund Holders: 33
Advance Auto Parts, Inc. is an American automotive aftermarket parts company. On September 15, Advance Auto Parts, Inc. declared a $1.50 per share quarterly dividend, in line with previous. The dividend was paid to shareholders on September 30. The company delivered a dividend yield of 3.84%. Although the stock dropped notably after its Q2 earnings release, the long-term growth thesis seems to be intact. It is one of the best cyclical stocks for dividend growth investors.
On August 25, Raymond James analyst Bobby Griffin reiterated a Strong Buy rating on Advance Auto Parts, Inc. but lowered the price target on Advance Auto Parts, Inc. to $220 from $250. While he trimmed FY22 estimates primarily on the back of lower-than-expected comp sales performance for Q2 and lowered forecasts for DIY demand in the second half, the analyst expects Advance Auto Parts, Inc.’s margin expansion to remain robust. He views Advance Auto Parts, Inc. as “uniquely positioned to perform well in this environment” relative to most retailers due to the internal margin improvement opportunities that are entirely dependent on revenue.
Among the hedge funds tracked by Insider Monkey, 33 funds were long Advance Auto Parts, Inc. at the end of Q2 2022, compared to 29 funds in the last quarter. Israel Englander’s Millennium Management is the biggest stakeholder of the company, with 1.25 million shares worth close to $218 million.
Here is what ClearBridge Investments Large Cap Growth Strategy has to say about Advance Auto Parts, Inc. 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. We expect the supply chain constraints contributing to inflation and goods shortages will begin to lessen with an ambitious rebuilding of inventories. This should be a multi-year phenomenon beneficial to quality industrials with high levels of organic growth like distributors such as Advance Auto Parts.”
5. Boyd Gaming Corporation (NYSE:BYD)
Number of Hedge Fund Holders: 35
Boyd Gaming Corporation is a Chinese conglomerate that manufactures automobiles, buses, electric bicycles, trucks, forklifts, solar panels, and rechargeable batteries. On September 15, Boyd Gaming Corporation declared a quarterly dividend of $0.15 per share, in line with previous. The dividend is payable on October 15, to shareholders of record as of September 30. Boyd Gaming Corporation is one of the best cyclical stocks to buy now.
On September 23, JMP Securities analyst Jordan Bender initiated coverage of Boyd Gaming Corporation with an Outperform rating and a $65 price target. The analyst sees a “disconnect” between the stock’s valuation and gaming fundamentals. However, the macro backdrop in Nevada remains resilient, driving a strong spend per head in the locals/downtown market, where Boyd Gaming Corporation makes 39% of its earnings, the analyst told investors. The analyst said Nevada has proven to be one of the strongest gaming markets.
Among the hedge funds tracked by Insider Monkey, 35 funds were bullish on Boyd Gaming Corporation at the end of June 2022, compared to 40 funds in the last quarter. Parag Vora’s HG Vora Capital Management is the leading stakeholder of the company, with 4.75 million shares valued at $236.3 million.
Here is what Baron Real Estate Fund has to say about Boyd Gaming Corporation in its Q2 2022 investor letter:
“Boyd Gaming Corporation is one of the largest and most successful casino entertainment companies in the U.S. The company owns and operates 28 casino gaming properties in 10 states with a large presence in Las Vegas. Business conditions have been strong, yet the shares are valued at only 6 times 2022 estimated cash flow versus a long-term average of more than 9 times cash flow. The company maintains a strong and liquid balance sheet. Insiders own approximately 27% of the company. We believe Boyd is a compelling acquisition target.”
4. Deckers Outdoor Corporation (NYSE:DECK)
Number of Hedge Fund Holders: 35
Deckers Outdoor Corporation (NYSE:DECK) is a California-based designer footwear company. The company authorized a $1.2 billion share repurchase program in the second quarter of 2022. Deckers Outdoor Corporation believes that fiscal year 2023 is off to a solid start, and the full-year 2022 EPS guide was boosted to $17.50-$18.35, up from the earlier forecast of $17.40-$18.25. Similarly, guidance for revenue growth of 10%-11% and operating margin of 17.5%-18.0% was reiterated for the full year.
On September 15, Wedbush analyst Tom Nikic upgraded Deckers Outdoor Corporation to Outperform from Neutral with a price target of $410, up from $320. The analyst also added Deckers Brands to the Wedbush Best Ideas List. Amidst an extremely difficult retail environment, Deckers Outdoor Corporation stood out in the last earnings season as one of the only firms in his coverage to actually raise guidance, the analyst added. With a combination of top-line growth, resilient margins, and a fortress balance sheet, the analyst believes that “this high-quality name is poised to be a continued outperformer.”
According to Insider Monkey’s data, 35 hedge funds were long Deckers Outdoor Corporation at the end of Q2 2022, compared to 46 funds in the prior quarter. Robert Pitts’ Steadfast Capital Management is the largest stakeholder of the company, with 1.26 million shares worth $323.8 million.
3. Brunswick Corporation (NYSE:BC)
Number of Hedge Fund Holders: 36
Brunswick Corporation (NYSE:BC) operates in the recreational marine industry, and it owns major boating including Sea Ray, Boston Whaler, Bayliner, Mercury Marine, Attwood, Lund, Crestliner, Mastervolt, MotorGuide, Harris Pontoons, Freedom Boat Club, Princecraft, Heyday, Lowe, Uttern, Quicksilver, and CZone, among many others. In Q3 2022, the company expects revenue growth of mid-twenties percent more than the third quarter of 2021 and an EPS between $2.50 and $2.65. Brunswick Corporation is one of the best cyclical stocks to consider.
On August 9, BMO Capital analyst Gerrick Johnson upgraded Brunswick Corporation to Outperform from Market Perform with a price target of $110, up from $90. The stock has pulled back to an attractive valuation due to investor concerns about sustainable demand and the impact of a weakening economy, the analyst told investors. The present valuation “more than takes these factors into account” while demand for boats and marine products continues to be robust, meaningfully exceeding supply, noted the analyst.
Among the hedge funds tracked by Insider Monkey, 36 funds were long Brunswick Corporation at the end of June 2022, compared to 37 funds in the prior quarter. William Von Mueffling’s Cantillon Capital Management is the biggest stakeholder of the company, with 4.3 million shares valued at $284 million.
Here is what Chartwell Investment Partners has to say about Brunswick Corporation in its Q2 2022 investor letter:
“We also took advantage of the sell-off in boat & engine manufacturer Brunswick Corp. (NYSE:BC, 2.3%) and added to the holding. This stock sells at less than 7 times its annual earnings per share ’22 EPS estimates. The company recently held an analyst briefing and quantified the downside to sales, margins, and earnings in an economic downturn. We think the stock is attractively priced even in that scenario and that it is a long-term double-digit-percentage earnings grower.”
2. RH (NYSE:RH)
Number of Hedge Fund Holders: 59
RH (NYSE:RH) is a California-based retailer of home furnishings, selling furniture, lighting, textiles, decor, and outdoor and garden equipment. The company reported $8.08 in adjusted diluted EPS and $992 million in revenue for the second quarter of 2022, beating market estimates of $6.70 and $969.20 million, respectively. RH is one of the best cyclical stocks to invest in.
William Blair analyst Phillip Blee on September 21 assumed coverage of RH with an Outperform rating and no price target. The company recently posted better than anticipated sales and earnings for fiscal Q2 but lowered its full-year outlook on the back of a largely uncertain macro environment, the analyst told investors in a research note. While RH profited from broader consumer trends over the last two years, the analyst believes the company remains well positioned for long-term sales growth and margin expansion, despite some short-term headwinds.
Among the hedge funds tracked by Insider Monkey, 59 funds reported owning stakes worth $2.05 billion in RH at the end of Q2 2022, compared to 63 funds in the prior quarter worth $2.84 billion. Warren Buffett’s Berkshire Hathaway is the largest position holder in the company, with 2.17 million shares valued at $460.6 million.
Here is what GreenWood Investors specifically said about RH in its Q2 2022 investor letter:
“Gary Friedman, the owner manager of RH, has been talking about the company climbing the luxury mountain over the past few years. Wall Street is skeptical RH can hold its leading margin profile after elevated demand during Covid, and it surely doubts that it is a luxury company, at 10x earnings. We’ve been looking to get involved in the housing ecosystem given the dramatic selloff in the sector over the past year, and our first investment here is via RH. Demographically, we expect US household formation to remain very strong after a decade of underinvestment in housing supply. Gary strategically with-held new product launches in the aftermath of Covid, when times were easiest, and is now releasing a new premium product lineup. We believe there is a lot of latent pricing power in home furnishing, and while high interest rates are trapping people in a home they would otherwise possibly leave, we believe the consumer, particularly the high-end consumer, will look to continue to upgrade their homes.
The truest test of Gary’s quest to make RH a true luxury company is in fact a recession. One of the reasons why there are few, if any, American luxury businesses, is that without a family controlling the company, optimizer-oriented management teams cannot withstand the pain that comes from not discounting a product line into weak demand. We can’t recall a single American company that has “destroyed” inventory like the French luxury companies in the face of a recession. Many have tried. Few, if any, have succeeded.
Anchored by Gary’s 21% ownership of the company, RH has a good chance. And not only is it not tempted in the current volatile environment to discount, but he is actually raising prices. With a buyback authorized for over 30% of the shares outstanding, Friedman is also not shying away from making bold investments in the current environment. He is aggressively expanding galleries and introducing new marquee European properties. The combined product launch cadence, increased prices, aggressive footprint investments and forthcoming share repurchases, not to mention low valuation, made us move off the sidelines and take a position in RH. While we are certainly not hoping for a recession, we are excited that such an environment could solidify Gary’s mission to make RH a rare American luxury brand.”
1. General Motors Company (NYSE:GM)
Number of Hedge Fund Holders: 75
General Motors Company manufactures and sells trucks, crossovers, cars, electric vehicles, and automobile parts and accessories in North America, the Asia Pacific, the Middle East, Africa, South America, the United States, and China. The company announced on September 23 that it will spend $760 million to renovate its Propulsion Systems factory in Toledo, Ohio, to build drive units used in electric vehicles. The plant will make drive lines for future electric trucks including the Chevrolet Silverado, GMC Sierra pickup, and GMC Hummer EVs.
Citi analyst Itay Michaeli on September 23 maintained a Buy recommendation on General Motors Company but lowered the price target on the shares to $78 from $87. The analyst adjusted his traditional automaker and tier-1 supplier models to factor in reduced production estimates, mainly due to constrained supply chains in 2023, as well as a weak macro outlook in Europe. However, the analyst sees a comparatively better setup for automakers than suppliers, though he expects the setup to “evolve” as Q3 results near. He believes automaker fundamentals “still appear more macro resilient than what’s currently priced-in.”
According to Insider Monkey’s data, 75 hedge funds were bullish on General Motors Company at the end of Q2 2022, compared to 76 funds in the last quarter. Harris Associates is one of the leading stakeholders of the company, with 43.6 million shares worth $1.4 billion.
Here is what Chartwell Investment Partners has to say about General Motors Company in its Q2 2022 investor letter:
“The three worst-performing stocks in the Dividend Equity accounts include General Motors (NYSE:GM, 2.4%), down 27.4%. GM posted solid first-quarter earnings, but supply issues continue to be a headwind and the market appears to be “pricing-in” at least a mild recession. The question seems to be: by the time the supply constraints are resolved, will we be in a much-worse economic scenario that will “hit” the demand side?
After a couple quarters of higher-than-average trading, Q2 was extremely light in both the Growth & Balanced and Dividend Equity accounts (see below). After trimming GM earlier in the year at much higher price levels, we added back to the position. Now trading at $32 per share, GM’s P/E multiple on 2022 earnings estimates is below 5 times its annual earnings per share, which we think is very attractive and is already pricing-in at least a mild recession.”
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This article is originally published at Insider Monkey.
