In this article we will take a look at 12 undervalued cyclical stocks for 2021.
Businesses that rise and fall with the economic cycle have always baffled investors. These cyclical stocks tend to perform very well during an economic boom but register spectacular losses during recessions. Some industries that spring to mind based on this trend are the entertainment, automobile, construction, and transportation sectors. They are also sometimes referred to as consumer discretionary stocks because the companies comprising them sell items that are not essential to the everyday life of an individual.
During the past twelve months, the Consumer Discretionary Select Sector SPDR Fund (NYSE: XLY) – made up of firms in cyclical sectors like retail, hotels, restaurants, and leisure – has performed better than the wider market, giving investors a total return of 59.5% compared to the 52.8% offered by the Russell 1000. Most of the growth in cyclical stocks came after the announcement of the successful clinical trials of the COVID-19 vaccine towards the end of last year. As the economy slowly reopens in 2021, these stocks are expected to soar even further.
What Are Undervalued Cyclical Stocks?
Delta Air Lines, Inc. (NYSE: DAL), an airline carrier based in the US, took a huge hit in 2020 as international travel ground to a halt. However, a travel boom is in the offing with the rollout of the coronavirus vaccine. Delta Air Lines, Inc. (NYSE: DAL) stands to benefit immediately from the trend. It has ordered new aircraft as bookings improve – the airline says leisure bookings have recovered to about 85% of the level seen in 2019 – and airline executives have affirmed that Delta could break even as early as June after posting losses of $1.2 in the first quarter of 2021.
Not all cyclical companies see revenues decline during tough times. Walmart Inc. (NYSE: WMT), an Arkansas-based retail chain, actually registered an increase in earnings during the COVID-19 pandemic. One secret to the resilience of Walmart Inc. (NYSE: WMT), the largest retail brand in the US in terms of sales, during the pandemic was the pivot to digital: online sales increased 69% for the fourth quarter of 2020. The firm also plans to invest $14 billion this year in distribution networks alone to establish itself further in the retail sector.
The TJX Companies, Inc. (NYSE: TJX), another retail brand based in the United States, saw share price fall to as low as $42 in the first half of 2020, but has since recovered and even beaten pre-pandemic highs as the vaccine rollout enables a return to normality and people splash money on retail goods. A survey conducted by management consultancy McKinsey indicates that more than 50% of US consumers are likely to spend extra money to treat themselves as lockdown eases. The TJX Companies, Inc. will benefit from this trend.
It is not only retail brands whose fortunes are tied to the economic conditions. The manufacturing and construction sector is also cyclical. Haverty Furniture Companies, Inc. (NYSE: HVT), a furniture brand, posted a 31% increase in sales in the first quarter of 2021 compared to the same period last year. The company is now working to hire staff amid a growth in business. Haverty Furniture Companies, Inc. (NYSE: HVT) closed stories and halted deliveries through most of 2020 due to the pandemic.
A similar story can be followed in the construction industry. Lumber Liquidators Holdings, Inc. (NYSE: LL), a firm that offered floor-related services using imported Chinese material, suffered huge setbacks at the onset of the pandemic with share price falling to below $7 in April 2020. The company has rebounded since and is expected to be a top beneficiary of a government plan to help American manufacturers compete with Chinese firms. Earlier this month, Lumber Liquidators Holdings, Inc. posted a second straight quarter of double digit growth.
It is very difficult to predict economic cycles with enough precision to make healthy gains from cyclical stocks. The COVID-19 pandemic and the slow reopening of the economy has made it even harder to identify undervalued cyclical stocks that will offer handsome returns in the coming months. However, the disruption of the stock market by overvalued technology stocks seems to be occupying the attention of most financial advisors and this is a good chance to place high-risk, high-reward bets on undervalued cyclicals in the first half of 2021.
Investors should still be cautious about the uncertainty in the stock market due to the overall economic conditions. The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
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With this context in mind, here is our list of 12 undervalued cyclical stocks for 2021.
Undervalued Cyclical Stocks for 2021
12. The Dixie Group, Inc. (NASDAQ: DXYN)
Number of Hedge Fund Holders: 4
The Dixie Group, Inc. (NASDAQ: DXYN) is a Georgia-based firm that makes and sells luxury soft floor covering carpets and rugs. The company also manufactures engineered wood products. Two brands associated with the group, Masland Residential and Dixie Home, provide products like residential carpets and vinyl flooring products to retailers, furniture stores, interior designers, and luxury home builders. The company was founded in 1920 and is ranked twelfth on our list of 12 undervalued cyclical stocks for 2021.
In November 2020, the share price of The Dixie Group, Inc. (NASDAQ: DXYN) jumped more than 24% after it reported a profit in the third quarter of the year. During the period, sales for the company grew 41% from the prior quarter and stood at $85.92 million. The firm said at the time that commercial product revenue was down 41% due to COVID-19 but residential product revenue had increased by 3%.
At the end of the fourth quarter of 2020, 4 hedge funds in the database of Insider Monkey held stakes worth $5 million in the firm, up from 2 in the preceding quarter worth $1.2 million.
11. Delta Air Lines, Inc. (NYSE: DAL)
Number of Hedge Fund Holders: 58
Delta Air Lines, Inc. (NYSE: DAL) is a Georgia-based air transportation service. It is one of the largest airlines in the United States and was founded in 1924. It is placed eleventh on our list of 12 undervalued cyclical stocks for 2021. The firm provides air transportation, cargo, as well as aircraft maintenance, repair, and overhaul services. Delta Air operates more than 1,100 aircraft and flies to hundreds of international destinations. The company also offers aircraft charter services to select customers.
On April 23. Delta Air Lines, Inc. (NYSE: DAL) announced that it had agreed to buy 25 more Airbus 321 aircraft in anticipation of a boom in business as international and domestic travel resumes after the pandemic. The new additions would bring the total number of such planes in the Delta fleet to 125.
Out of the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Citadel Investment Group is a leading shareholder in the firm with 5.3 million shares worth more than $215 million.
In one of their investor letters, Miller Value Partners highlighted a few stocks and Delta Air Lines Inc. (NYSE:DAL) is one of them. Here is what Miller Value Partners’ said:
“Delta Air Lines Inc. (DAL) declined -1.38% over the period after the initial hit to the stock in 1Q following the outbreak of the COVID-19 pandemic. The company reported 1Q results with EPS of -$0.51, in-line with consensus. The company guided for June revenue to be down 90% YoY and announced another $1B cut to capital expenditures (CAPEX) for a total cut of $3B so far this year. The company ended the quarter with $6B in liquidity and they expect to end the June quarter with $10B in liquidity. Delta held its annual shareholders’ meeting where it noted that it expects to finish the 2nd quarter with over $15B in liquidity with a daily cash burn of $30M getting to breakeven by the end of the year.”
10. Fuwei Films (Holdings) Co., Ltd. (NASDAQ: FFHL)
Number of Hedge Fund Holders: 1
Fuwei Films (Holdings) Co., Ltd. (NASDAQ: FFHL) is a China-based company that makes and sells biaxially oriented polyethylene-terephthalate films. The products marketed by the firm are used in a variety of things like circuit boards production, nameplate, crafts etching, as well as packaging for cigarettes and alcohol; and printing items. Fuwei has a thriving export business that caters to clients in Europe and North America. The firm was founded in 2003 and is ranked tenth on our list of 12 undervalued cyclical stocks for 2021.
Late last year, Fuwei Films (Holdings) Co., Ltd. (NASDAQ: FFHL) announced that it was selling its Dornier production line for $21 million. On April 22, the company posted a quarterly revenue of $13 million, up almost 6% compared to the previous year. Fuwei is expected to benefit from an increase in demand for goods as the vaccine rollout boosts the retail sector.
At the end of the fourth quarter of 2020, 1 hedge fund in the database of Insider Monkey held stakes worth $3.4 million in the firm, the same as in the preceding quarter worth $1 million.
9. TPI Composites, Inc. (NASDAQ: TPIC)
Number of Hedge Fund Holders: 27
TPI Composites, Inc. (NASDAQ: TPIC) is an Arizona-based firm that makes and sells wind blades and other related equipment. It was founded in 1968 and is placed ninth on our list of 12 undervalued cyclical stocks for 2021. The firm also offers products that are used in the transportation industry; field service inspection and repair services. It has operations in the US, Mexico, India, as well as the Middle East and Europe.
On April 23, TPI Composites, Inc. (NASDAQ: TPIC) was picked as one of the top picks for the year by investment bank Morgan Stanley after President Biden held a summit of world leaders on climate change and reiterated America’s leading role in this regard. On April 20, investment advisory Evercore had also rated TPI positively for the same reasons.
Out of the hedge funds being tracked by Insider Monkey, London-based investment firm Greenvale Capital is a leading shareholder in the firm with 1.1 million shares worth more than $62 billion.
In their Q4 2020 investor letter, Wasatch Micro Cap Value Fund highlighted a few stocks and TPI Composites Inc. (NASDAQ:TPIC) is one of them. Here is what the fund said:
“TPI Composites, Inc. (TPIC) was also a large contributor. Occasionally, we’re asked how our holdings measure up to the priorities of the Democratic Party. In general, we believe a strong company will thrive regardless of which political party is in power. But it’s possible some of our holdings will align particularly well with the incoming Democratic agenda. TPI Composites is a good example of a company that’s well-positioned for green-energy initiatives. The company designs and manufactures composite wind blades for wind energy. The stock was up strongly after TPI announced third-quarter net sales had increased 23.5% compared to the year-ago period. We believe some of this increase was due to the resumption of business that had been postponed during the height of the Covid anxiety. We’d like to find more alternative-energy companies to invest in, but it’s often difficult to uncover companies in this segment that meet our valuation and business-quality standards.”
8. BBQ Holdings, Inc. (NASDAQ: BBQ)
Number of Hedge Fund Holders: 4
BBQ Holdings, Inc. (NASDAQ: BBQ) is a Wisconsin-based franchise of restaurants that serve pork ribs, chicken, beef brisket, along with several flavors of barbecue sauce. The restaurants are mostly located in the US Midwest and the first branch was opened in 1994. The company is eighth on our list of 12 undervalued cyclical stocks for 2021. There are some units of the company outside the US too, like in Canada and the United Arab Emirates. The firm operates close to 150 restaurants under the brand name.
BBQ Holdings, Inc. (NASDAQ: BBQ) was earlier this month identified as one of the restaurant stocks with the biggest year-to-date returns by investment firm Advisor Shares. On April 20, the company said that it estimated revenues of more than $150 million in 2021, a significant boost from the $121 million posted in the previous year.
At the end of the fourth quarter of 2020, 4 hedge funds in the database of Insider Monkey held stakes worth $18 million in the firm, the same as in the preceding quarter worth $12 million.
7. Cannae Holdings, Inc. (NYSE: CNNE)
Number of Hedge Fund Holders: 34
Cannae Holdings, Inc. (NYSE: CNNE) is a Las Vegas-based holding firm with interests in the restaurants, technology, healthcare, and financial services sectors. The holding firm primarily manages and operates several different firms and investments, in addition to making majority and minority equity portfolio investments in businesses. It was founded in 2014 and is ranked seventh on our list of 12 undervalued cyclical stocks for 2021.
Cannae Holdings, Inc. (NYSE: CNNE) announced in early March that it would invest $50 million in the merger of QOMPLX and Tailwind Acquisition. In the same month, the firm said it was initiating a 10 million share buyback program that could reduce the total outstanding shares in the firm by over 11% over a period of three years.
Out of the hedge funds being tracked by Insider Monkey, New York-based firm Nitorum Capital is a leading shareholder in the firm with 3.7 million shares worth more than $164 million.
6. XpresSpa Group, Inc. (NASDAQ: XSPA)
Number of Hedge Fund Holders: 6
XpresSpa Group, Inc. (NASDAQ: XSPA) is a New York-based health services company that primarily offers spa services at several different airports. At outlets on airports, the firm offers massage, nail and skin care, as well as travel and retail products. The health and wellness centres of the firm also provide COVID-19 testing and other medical diagnostic testing services. The firm runs 45 locations in 23 airports globally. It is placed sixth on our list of 12 undervalued cyclical stocks for 2021.
XpresSpa Group, Inc. has a market cap of more than $150 million and posted annual revenue of $8.3 million in 2020, down from more than $47 million in 2019. However, as the pandemic subsides and people start to travel again, the firm is expected to gain back in the niche market it otherwise dominates.
At the end of the fourth quarter of 2020, 6 hedge funds in the database of Insider Monkey held stakes worth $4.6 million in the firm, up from 3 in the preceding quarter worth $2.5 million.
5. Superior Group of Companies, Inc. (NASDAQ: SGC)
Number of Hedge Fund Holders: 5
Superior Group of Companies, Inc. (NASDAQ: SGC) is a Florida-based firm that manufactures and sells apparel and accessories. It was founded in 1920 and is placed fifth on our list of 12 undervalued cyclical stocks for 2021. Some of the products that the firm makes include uniforms, corporate identity apparel, career apparel, and accessories for personnel of hospitals and health facilities, among others. It also has stakes in the telemarketing business.
In early November 2020, Superior Group of Companies, Inc. (NASDAQ: SGC) said that it had filed a prospectus for $120 million worth of mixed shelf offering. The firm launched a secondary offering of 750,000, detailing that the money would be used for general corporate purposes. In February this year, the firm declared a quarterly dividend of $0.1 per share, in line with estimates.
Out of the hedge funds being tracked by Insider Monkey, Greenwich-based investment firm Steamboat Capital Partners is a leading shareholder in the firm with 138,542 shares worth more than $3.2 million.
4. Fisker Inc. (NYSE: FSR)
Number of Hedge Fund Holders: 18
Fisker Inc. (NYSE: FSR) is a Manhattan Beach-based company that makes electric vehicles.The firm is aiming to set itself apart from the competition by producing vehicles that go more miles on a single charge, a car it has said it is presently working on, as well as EVs made from sustainable products like recyclables. Fisker Ocean, one of the products marketed by the firm, is expected to begin production in 2022. Fisker was founded in 2016 and is ranked fourth on our list of 12 undervalued cyclical stocks for 2021..
Fisker Inc. (NYSE: FSR) was rated Overweight by investment bank Morgan Stanley last week after the bank forecast a strong quarter for electric vehicle makers as the economy reopened in China and the United States, increasing the demand for EVs that had fallen during the pandemic in 2020.
At the end of the fourth quarter of 2020, 18 hedge funds in the database of Insider Monkey held stakes worth $146 million in the firm, up from 17 in the preceding quarter worth $132 million.
3. Lumber Liquidators Holdings, Inc. (NYSE: LL)
Number of Hedge Fund Holders: 17
Lumber Liquidators Holdings, Inc. (NYSE: LL) is a Virginia-based company that provides hardwood flooring and other related services in the United States. It was founded in 1994 and is placed third on our list of 12 undervalued cyclical stocks for 2021. Some of the services that the company offers include hardwood species, engineered hardwood, laminate, resilient vinyl, water-resistant vinyl plank, and porcelain tile flooring products.
Lumber Liquidators Holdings, Inc. (NYSE: LL) has a market cap of over $719 million and posted annual revenue of $1.1 billion in 2020, up slightly from $1.09 billion posted the year before. The firm saw its share price jump more than 9% in November 2020 after it posted encouraging quarterly results despite the pandemic situation.
Out of the hedge funds being tracked by Insider Monkey, New York-based investment firm DE Shaw is a leading shareholder in the firm with 895,094 shares worth more than $27 million.
2. Haverty Furniture Companies, Inc. (NYSE: HVT)
Number of Hedge Fund Holders: 15
Haverty Furniture Companies, Inc. (NYSE: HVT) is a Georgia-based retail furniture company. It offers upholstery products and eclectic looks, as well as mattress products. The company operates through retailers, third-party sellers and has an online presence as well. It runs more than 100 shops in different US states. The company was founded in 1885 and is placed second on our list of 12 undervalued cyclical stocks for 2021.
Haverty Furniture Companies, Inc. (NYSE: HVT) declared a quarterly dividend of $0.22 per share on February 22, in line with estimates. The company has reported strong growth in the last two quarters and will benefit as the economy reopens and spending on retail increases.
At the end of the fourth quarter of 2020, 15 hedge funds in the database of Insider Monkey held stakes worth $68 million in the firm, up from 14 in the preceding quarter worth $52 million.
1. The TJX Companies, Inc. (NYSE: TJX)
Number of Hedge Fund Holders: 68
The TJX Companies, Inc. (NYSE: TJX) is a Framingham-based multinational company that sells clothing. The famous brand names for the firm include Marmaxx, HomeGoods, TJX Canada, and TJX International. It operates more than 3,500 stores in the US and thousands more across the world, primarily in Australia and Canada. The company was founded in 1956 and is placed first on our list of 12 undervalued cyclical stocks for 2021.
The TJX Companies, Inc. (NYSE: TJX) is one of the biggest retailers that could expect a strong comeback from the reopening of markets and stores as the vaccine rollout allows people to venture out in public spaces. On March 30, the company declared a quarterly dividend of $0.26 per share, in line with previous estimates.
Out of the hedge funds being tracked by Insider Monkey, New York-based investment firm Alkeon Capital Management is a leading shareholder in the firm with 6 million shares worth more than $416 million.
Giverny Capital, in their Q1 2021 investor letter, mentioned The TJX Companies, Inc. (NYSE: TJX). Here is what Giverny Capital has to say about The TJX Companies, Inc. in their Q1 2021 investor letter:
“We’re pretty happy with the current portfolio and so were not very active during the quarter. Our only consequential decision in the first quarter was to exit the off-price retailer The TJX Companies in January. My prior firm owned TJX for most of the past 20 years and enjoyed appreciation on the order of 20 times the original purchase price.
TJX is a great company, but the growth rate has slowed in recent years and the operating margin has been under pressure, mainly from rising wages for store workers. When the pandemic hit, I bought the stock for GCAM in the belief that if the US fell into a prolonged recession, TJX would be a winner because of its extreme value position.
The US didn’t fall into a prolonged recession. Rather, many consumers are flush with cash thanks to government relief programs. But brick-and-mortar stores are losing out to online competitors for reasons of safety and convenience. TJX has fared much better than most of its competitors during this time and should continue to do so, thanks to its model of buying inventory close to need and reacting to what is happening in the marketplace rather than trying to create hot product. But the stock rose about 50% in the few months we owned it and that increase seemed to price in a complete recovery and more. We sold in early January.”
You can also take a peek at 10 Best Travel Stocks to Buy Right Now, and 10 Best Automotive Stocks to Invest in Now.
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Disclosure: None. 12 Undervalued Cyclical Stocks for 2021 is originally published on Insider Monkey.
