Cyclical stocks are companies that tend to perform well when the economy is trending up, which means that if you are a big believer in the ongoing recovery from the pandemic you should be very interested in this area of the market. These companies offer products and services that are in high demand when the economy is doing well but also get hit hard during economic contractions. That means a lot of these cyclical stocks were punished during the pandemic and in some cases have yet to fully recover their pre-pandemic prices.
With the U.S. Commerce Department releasing early estimates for US GDP for Q1 2021 of 6.4%, there’s a good chance the economy is well on its way towards a full rebound. It’s also possible that this is the beginning of a multi-year rally in cyclical names given all of the unprecedented activity that has taken place to stimulate the economy. Several hot cyclical stocks stand out as smart buys at this time, let’s take a look at 3 of them below.
1. Williams-Sonoma
Specialty retailers like Williams-Sonoma (NYSE:WSM) are a great example of a cyclical company that could be in for strong growth as the economy gets healthier. Combine that with trends like e-commerce growth and people spending more time at home and you have the recipe for a long-term winner. Williams-Sonoma sells high-quality home furnishings products and operates 614 retail stores under the Williams-Sonoma, Pottery Barn, West Elm, and Rejuvenation brands. What stands out about this company in the crowded retail sector is that it sells unique merchandise including high-end cookware, cutlery, home furnishings, and decorative accessories.
Williams-Sonoma reported a very strong FY 21 that saw the company almost double its EPS year-over-year and deliver record sales growth. The company also saw e-commerce revenues account for 70% of the company’s $6.8 billion in sales, which tells us that it has effectively developed this important sales channel. With brands that appeal to younger generations like Millennials who are buying homes for the first time and lofty ambitions to reach $10 billion in revenue in the next 5 years, investors should be confident in this company’s vision and its proven track record with building successful brands.
2. Honeywell
This diversified industrial conglomerate is a great cyclical stock for a variety of reasons. First, Honeywell (NYSE:HON) is a leading blue-chip industrial company that has a history of growing its dividends over the years. That tells us that Honeywell is a well-managed company that has been able to successfully deal with the ups and downs of the economy over the years. Additionally, many of the company’s end markets including aerospace, process automation, and industrial materials should see sharp rebounds as the global economy recovers from the impacts of the pandemic.
Honeywell recently beat earnings estimates and exceeded its own guidance, but it’s worth mentioning that the company is still dealing with an ongoing recovery in some of the areas of the business that were hit hardest by the pandemic. Specifically, the commercial airline industry has been a major drag on earnings and resulted in a 22% year-over-year decline in the company’s aerospace sales in Q1. With that said, Honeywell raised its full-year sales and adjusted EPS guidance and should see even better results as the year goes on, especially as the aviation industry bounces back. The bottom line here is that Honeywell is a great cyclical stock to own given the company’s strong balance sheet and potential to outperform in 2021.
3. Weyerhaeuser
In case you haven’t noticed, the price of lumber is consistently hitting record highs thanks to huge demand in the housing market. It’s up over 280% since the start of the pandemic and builders are scrambling for supply. That’s a big reason to consider adding shares of this hot cyclical stock, Weyerhaeuser (NYSE:WY). It’s one of the world’s largest integrated forest products companies that is primarily involved in growing and harvesting timber. The company also produces, distributes, and sells wood and paper products.
As the largest private owner of timberlands in the U.S. and a company with very solid fundamentals, this REIT is a great way to take advantage of the lumber shortage. Keep in mind that the global demand for lumber will likely be extremely high for the remainder of the year, which will keep prices inflated and benefit this company’s earnings in a big way. When you account for the fact that Weyerhaeuser stock also offers a 1.76% dividend yield and has rallied 17% year-to-date, it's even easier to have conviction in adding shares. This is a cyclical stock that is a clear buy for as long as the housing boom lasts.