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.

6. The Home Depot, Inc. (NYSE:HD)

Number of Hedge Fund Investors: 82

The Home Depot, Inc. (NYSE:HD) is the largest home improvement retailer in the United States that offers a wide range of building materials, tools, appliances, and services. The company serves both professional contractors and DIY homeowners through over 2,300 stores and e-commerce platforms.

The Home Depot, Inc. (NYSE:HD) is concentrating on creating a seamless and integrated shopping experience for its customers. Over the past several years, the company has invested in building a robust downstream supply chain, including 19 direct fulfillment centers, which enable same or next-day delivery to 90% of the U.S. population. This infrastructure has been further enhanced by expanding the assortment in these facilities, allowing for faster delivery speeds across a wider range of products. The company has also made significant website enhancements to better communicate these delivery options and has launched a marketing campaign to build awareness and drive greater customer engagement.

The Home Depot, Inc. (NYSE:HD) is also focused on growing its share in the professional market through the Pro Ecosystem which is operational in 17 U.S. markets. This ecosystem includes specialized capabilities and services designed to meet the unique needs of professional contractors. The company has introduced a Pro Customer Experience Manager role to enhance connectivity between in-store and outside sales teams, ensuring a more seamless and exceptional service experience for pro customers. Additionally, The Home Depot, Inc. (NYSE:HD) is improving its data and analytics tools to provide more robust insights to drive deeper engagement and actionable outcomes.

5. MercadoLibre, Inc. (NASDAQ:MELI)

Number of Hedge Fund Investors: 87

MercadoLibre, Inc. (NASDAQ:MELI) is the leading e-commerce platform in Latin America, often referred to as the “Amazon of Latin America.” The company operates a marketplace for buying and selling goods, a payment solution called MercadoPago, and a logistics network, MercadoEnvios. MercadoLibre, Inc. (NASDAQ:MELI) serves millions of users across Brazil, Mexico, and Argentina.

MercadoLibre, Inc. (NASDAQ:MELI) is continuously innovating to remove barriers to online shopping and increase e-commerce penetration in Latin America, where only 15% of commerce is currently conducted online. The company has introduced several user experience (UX) enhancements, such as a new tool that suggests high-frequency categories for users to shop based on their individual profiles. This personalized approach includes shortcuts to categories on the home page, special coupons, and push notifications, all designed to increase cross-category shopping and user engagement. MercadoLibre, Inc. (NASDAQ:MELI) has also introduced augmented reality technology to enable users to see makeup products applied to their faces, addressing a significant barrier to online beauty purchases.

MercadoLibre, Inc. (NASDAQ:MELI) is making significant investments in its logistics infrastructure to enhance the user experience and drive higher market penetration. The company has recently opened six new fulfillment centers, five in Brazil and one in Mexico. This expansion is part of a broader plan to more than double the number of fulfillment centers in Brazil by the end of 2025. These smaller, city-specific facilities are designed to increase the number of cities where same-day delivery is available by 40%.

4. Booking Holdings Inc. (NASDAQ:BKNG)

Number of Hedge Fund Investors: 93

Booking Holdings Inc. (NASDAQ:BKNG) is a global leader in online travel and related services, operating platforms such as Booking.com, Priceline, and Agoda. The company earns revenue through commissions on bookings for hotels, flights, car rentals, and vacation packages. Booking Holdings Inc. (NASDAQ:BKNG) has a presence in over 220 countries and relies on its robust technology and data analytics to optimize user experiences.

Booking Holdings Inc. (NASDAQ:BKNG) is focusing on its vision of a “Connected Trip,” where travelers can plan and book multiple elements of their trip on a single platform. This helps integrate different travel components into a more seamless booking experience. Additionally, the company is expanding its Genius loyalty program at Booking.com into other travel verticals, such as flights and rental cars, to further enhance the value proposition for both travelers and partners. By making it easier to plan and book multiple travel elements, the company aims to drive higher engagement and loyalty.

Booking Holdings Inc. (NASDAQ:BKNG) is also focusing on the expansion of its alternative accommodations segment, to provide a diverse range of accommodation options, from hotels to vacation rentals, to meet the varying needs and preferences of its travelers. The company has also launched several AI-driven tools, such as the AI trip planner on Booking.com. The company plans to use insights from AI trip planners to develop new applications, including a smart filter that makes over 200 potential search filters findable through a free text interface. Similar AI initiatives are underway across other brands, including Priceline’s Penny, a generative AI travel assistant, and Agoda’s implementation of over 120 use cases for GenAI across various functions.

3. Tesla, Inc. (NASDAQ:TSLA)

Number of Hedge Fund Investors: 99

Tesla, Inc. (NASDAQ:TSLA) is a pioneer in electric vehicles (EVs), renewable energy solutions, and sustainable technology. The company’s product lineup includes EVs such as the Model 3, Model S, and Cybertruck. Tesla, Inc. (NASDAQ:TSLA) is also at the forefront of innovation in robotics and autonomous driving, leveraging its advanced Full Self-Driving (FSD) software.

Tesla, Inc. (NASDAQ:TSLA) is focusing on ramping up its vehicle production and intends to introduce more affordable models in the first half of 2025. This initiative is aimed at making electric vehicles accessible to a broader audience. Additionally, the company is preparing to commence volume production of the Cybercab in 2026, targeting an initial output of at least 2 million units annually, with the potential to scale up to 4 million units in the future. This increase in production capacity is designed to meet the rising demand for electric vehicles.

Tesla, Inc. (NASDAQ:TSLA) is making significant progress in the development and deployment of autonomous driving technology. The company recently introduced version 13.0 of its Full Self-Driving technology. The new version will initially be rolled out to a select group of customers and aims to increase the miles between interventions by five to six times compared to the current version. Tesla (NASDAQ:TSLA) aims to achieve full autonomy by Q3 2025, with capabilities exceeding human driving expected by the end of 2025. The new version is part of the company’s long-term vision of achieving fully autonomous and sustainable transportation.

Tesla, Inc. (NASDAQ:TSLA) plans to roll out self-driving electric vehicles for ride-hailing services in California and Texas by mid-2025, benefiting from streamlined regulatory approval processes in these states. Currently, Tesla, Inc. (NASDAQ:TSLA) is testing this service internally by offering ride-hailing for its employees in the Bay Area.

2. Alibaba Group Holding Limited (NYSE:BABA)

Number of Hedge Fund Investors: 115

Alibaba Group Holding Limited (NYSE:BABA) is a Chinese multinational technology company specializing in e-commerce, cloud computing, and digital entertainment. The company operates leading platforms such as Taobao, Tmall, Alibaba Cloud, and Alibaba International Digital Commerce (AIDC), catering to businesses and consumers. Alibaba Group Holding Limited (NYSE:BABA) generates revenue through marketplace commissions, advertising, cloud services, and digital media.

Alibaba Group Holding Limited (NYSE:BABA) is placing a strong emphasis on improving the user experience across its platforms, particularly Taobao and Tmall. The company aims to increase purchase frequency and customer loyalty through initiatives such as the 88VIP Club loyalty program. Alibaba Group Holding Limited (NYSE:BABA) is also investing significantly in advanced technology and AI infrastructure to deliver more reliable and cost-effective AI-driven solutions across various industries. The company has implemented industry-standard software service fees and expanded the adoption of Quanzhantui, its AI-powered marketing tool, to help merchants enhance marketing efficiency.

Alibaba Group Holding Limited (NYSE:BABA) is also concentrating on improving the operational efficiency of its unprofitable segments, including local services and digital media and entertainment. Efforts are being made to enhance collaboration among its business units, especially in global logistics, to create a more integrated and streamlined ecosystem.

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

Number of Hedge Fund Investors: 286

Amazon.com, Inc. (NASDAQ:AMZN) is a global leader in e-commerce, cloud computing, and digital streaming. The company earns revenue through retail sales, third-party marketplace fees, and subscription services such as Amazon Prime, and AWS, its industry-leading cloud platform. Amazon.com, Inc.’s (NASDAQ:AMZN) customers include individual consumers, businesses, and government organizations.

Amazon.com, Inc. (NASDAQ:AMZN) is dedicated to enhancing customer experience and operational efficiency. In its retail segment, the company has launched initiatives to improve customer satisfaction, including unlimited grocery delivery from Whole Foods Market, Amazon Fresh, and other grocery partners for $9.99 per month, along with fuel discounts of $0.10 per gallon at select U.S. stations. To further reduce delivery times and costs, Amazon.com, Inc. (NASDAQ:AMZN) has restructured its fulfillment network to distribute inventory more effectively across regional centers. Additionally, the company continues to expand its Prime services, offering benefits such as fast and free delivery, streaming access, and exclusive deals.

Amazon.com, Inc. (NASDAQ:AMZN) is also advancing its advertising capabilities with new offerings, such as Prime Video advertising and Generative AI-powered creative tools, which are expected to fuel future growth. For consumers, the company has introduced AI-powered shopping assistants like Rufus, now available in multiple countries, which provides personalized recommendations and real-time pricing insights. Amazon.com, Inc. (NASDAQ:AMZN) is also upgrading Alexa with new foundational AI models and integrating artificial intelligence into its devices, including the latest Kindle Scribe. In Amazon Web Services (AWS), the company has outpaced competitors by launching nearly twice as many machine learning and Generative AI features in the past 18 months.

While we acknowledge the potential of Amazon.com, Inc. (NASDAQ:AMZN) to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AMZN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: 20 Best AI Stocks To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap.

Disclosure. None. Insider Monkey focuses on uncovering the best investment ideas of hedge funds and investors. Please subscribe to our daily free newsletter to get the latest investment ideas from hedge funds’ investor letters by entering your email address below.