Cyclical stocks are shares in companies whose performance is closely tied to the business cycle and economic conditions. These companies typically operate in industries that produce non-essential, or discretionary, goods and services, such as automobiles, housing, entertainment, travel, and retail.

During strong economic periods, cyclical stocks tend to perform well because consumers have more disposable income to spend on luxury items, vacations, and home improvements. Conversely, during economic downturns or recessions, people often cut back on discretionary spending, leading to a decrease in demand for these goods and services.

As the Federal Reserve lowers interest rates, it is creating a favorable environment for investing in cyclical stocks. Lower interest rates reduce the cost of borrowing, which encourages both consumers and businesses to take out loans and increase their spending. This uptick in consumer spending is especially beneficial for companies that rely heavily on discretionary purchases.

Read Also: 12 Cheapest Stocks with Biggest Upside Potential and Top 10 Undervalued Tech Stocks to Buy According to Hedge Funds.

On January 16, Reuters reported that the U.S. Commerce Department announced a rise in retail sales for December, driven by robust consumer demand for motor vehicles and a variety of other goods. The data highlights the economy’s resilience and supports the Federal Reserve’s cautious stance on further interest rate reductions this year. The upbeat retail figures, combined with recent labor market strength, prompted some economists to revise their economic growth forecasts for the fourth quarter closer to the strong pace seen in the July-September quarter.

Retail sales increased by 0.4% in December, following an upwardly revised 0.8% gain in November. Though economists had anticipated a 0.6% increase, the year-on-year growth stood at an impressive 3.9%. Auto dealership sales rose by 0.7%, while furniture stores and clothing retailers also posted gains of 2.3% and 1.5%, respectively. Miscellaneous store retailers, including gift shops and florists, led the charge with a 4.3% surge in receipts, while online store sales posted a modest 0.2% increase.

Core retail sales, which exclude volatile categories such as automobiles, gasoline, building materials, and food services, rose by a strong 0.7% in December after a 0.4% increase in November. These core sales closely align with the consumer spending component of GDP, leading economists to estimate a 3.3% annualized growth rate for consumer spending in the fourth quarter. Capital Economics revised its overall GDP growth forecast for the quarter to 2.9%, up from an earlier estimate of 2.7%.

Cyclical stocks present an attractive opportunity for investors looking to capitalize on favorable economic conditions and the Federal Reserve’s accommodative monetary policies. With consumer spending showing resilience, supported by strong retail sales and an optimistic GDP growth outlook, companies in discretionary sectors stand to benefit significantly. With that in context, let’s take a look at the 8 best cyclical stocks to buy according to hedge funds.

Our Methodology

To compile our list of the 8 best cyclical stocks to buy according to hedge funds, we used Finviz and Yahoo stock screeners to find the 20 largest consumer cyclical companies. From that list, we narrowed our choices to the 8 stocks according to their hedge fund sentiment, which was taken from Insider Monkey’s Hedge Fund database of 900 elite hedge funds as of Q3 of 2024. The list is sorted in ascending order of their hedge fund sentiment.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

8 Best Cyclical Stocks to Buy According to Hedge Funds

8. Starbucks Corporation (NASDAQ:SBUX)

Number of Hedge Fund Investors: 76

Starbucks Corporation (NASDAQ:SBUX) is a multinational coffeehouse chain and a leader in the coffee and specialty beverage industry. The company operates more than 32,000 stores worldwide that offer premium coffee, tea, and snack products along with other consumer-packaged goods, such as coffee beans and ready-to-drink beverages.

Starbucks Corporation (NASDAQ:SBUX) is embarking on a “Back to Starbucks” initiative aimed at returning the company to its core identity as a community coffeehouse. This strategy involves several key changes to enhance the in-store experience. Starbucks Corporation (NASDAQ:SBUX) is reintroducing coffee condiment bars and ceramic mugs for in-store use, which will not only improve the customer experience but also speed up service. Additionally, the company is rolling out the Clover Vertica brewers to all company-operated locations to ensure that customers can enjoy high-quality, on-demand brewed coffee.

Starbucks Corporation (NASDAQ:SBUX) also is simplifying its menu and customization options. The company is eliminating the upcharge for non-dairy milk, which is expected to reduce prices for nearly half of its customers who pay for modifiers. This move is part of a broader effort to make the pricing architecture more straightforward and logical. By reducing complexity, Starbucks Corporation (NASDAQ:SBUX) aims to enhance the overall customer experience, making it easier and more enjoyable for customers to order and enjoy their beverages. The company is also cutting down its menu to focus on fewer, better offerings, ensuring consistency and quality across its product line.

7. PDD Holdings Inc. (NASDAQ:PDD)

Number of Hedge Fund Investors: 78

PDD Holdings Inc. (NASDAQ:PDD), formerly known as Pinduoduo, is a Chinese e-commerce giant that operates a popular online marketplace connecting manufacturers with consumers. The company specializes in social commerce, where users participate in group buying to secure discounts. PDD Holdings Inc. (NASDAQ:PDD) caters to price-sensitive consumers across urban and rural China, with a focus on agricultural products, consumer goods, and electronics.

PDD Holdings Inc. (NASDAQ:PDD) is collaborating with manufacturers to explore full supply chain models, helping them advance their manufacturing processes and strengthen brand recognition. The company is also leveraging its digital capabilities to support high-quality merchants in product development, marketing, operations, and supply chain management. By fostering a strong partnership with manufacturers and merchants, PDD Holdings Inc. (NASDAQ:PDD) aims to drive industry transformation and advancement, ultimately leading to more valuable products and services for consumers.

Furthermore, PDD Holdings Inc. (NASDAQ:PDD) has introduced a $1.36 billion fee reduction program. This initiative includes service fee refunds, reduced fees for buy now and pay later services, lower security deposit requirements, and a more streamlined fund withdrawal process. These measures have significantly reduced operating costs for merchants, especially those in the agricultural and national goods sectors, allowing them to reinvest in product development and technological innovation.