Cyclical Sectors Gain Momentum in Early 2021: 7 Top Picks

Wall Street witnessed an impressive rally in 2020 defying coronavirus-induced economic devastations. The stock market's dream run continues in early 2021 too. While growth-oriented technology sector was the predominant driver behind last year's rally, cyclical sectors like consumer discretionary, industrials, materials, financials and oil-energy are the main sources of Wall Street's northbound journey so far this year.

Gradual reopening of the U.S. economy on the back of nationwide deployment of COVID-19 vaccines, a sharp rebound in aggregate consumer demand and recent spike in yields of sovereign government bonds have shifted investors' preference from growth stocks to cyclical stocks.

Cyclical Sectors Outperform Year to Date

A closer look at the performance of the S&P 500 Index — popularly known as the market's benchmark — so far this year reveals some interesting facts.

Cyclical sectors like Industrials Select Sector SPDR (XLI), Materials Select Sector SPDR (XLB), Financials Select Sector SPDR (XLF), Consumer Discretionary Select Sector SPDR (XLY) and Energy Select Sector SPDR (XLE (NYSE:XLE)) gained 3.1%, 3.7%, 9.9%, 3.3% and 21.9%, respectively. In contrast, the Technology Select Sector SPDR (XLK) has gained just 2.3%, underperforming the benchmark itself, which has advanced 3.2% year to date.

Reopening of U.S. Economy

The U.S. government has ramped up nationwide deployment of COVID-19 vaccines. Moreover, the news cases of coronavirus infections and hospitalization declined significantly this month. The combined effect of these two factors will be gradual reopening of the U.S. economy, which is operating at sub-optimal level since lockdowns were imposed last year. Notably, on Feb 1, the Congressional Budget Office (CBO) projected that the economy is expected to reach the pre-pandemic level of February 2020 by mid-2021.

Sharp (OTC:SHCAY) Rebound in Consumer Demand

The U.S. economy is witnessing strong consumer demand buoyed by massive fiscal and monetary stimulus injected in it. Moreover, the Democrats are moving forward with President Biden’s proposed $1.9 trillion COVID-19 relief package, which will further boost consumer demand.

Last week, Goldman Sachs reported that currently U.S. citizens have nearly $1.5 trillion in "excess" or "forced" savings that could climb to $2.4 trillion by mid-2021. The massive savings were due to concerns over pandemic-led economic uncertainties. Consumers were restrained or restricted by the government to spend on those items that were unavailable during lockdowns.

Reopening of the economy with massive savings is likely to boost personal spending, which in turn will raise demand for businesses, especially those in the cyclical sectors.

Spike in Sovereign Bond Yields

Wall Street's astonishing rally for the past 11 months prompted investors to shift the allotment of funds from safe-haven government bonds to risky equities. Consequently, on Feb 22, the yield on the benchmark 10-year US Treasury Note closed at 1.364% after hitting 1.377% in intraday trading, its highest since Feb 26, 2020. Furthermore, the yield on 30-year US Treasury Note ended at 2.181%, its highest since January 2020.

High risk-free return is detrimental to high growth industries like technology. Most of the growth companies depend on easy borrowing at cheap rates. Higher market interest rate will raise their cost of projects. As a result, market participants have started to reallocate their funds to cyclical stocks from growth stocks.

Our Top Picks

We have narrowed down our search to seven large-cap (market capital >$10 billion) cyclical stocks that have popped more than 10% year to date and still have upside left for 2021. These stocks have seen solid earnings estimate revisions in the past 30 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our seven picks year to date.

Denbury Inc. DEN operates as an independent oil and natural gas company in the United States. It holds interests in various oil and natural gas properties located in Mississippi, Texas, and Louisiana in the Gulf Coast region; and in Montana, North Dakota and Wyoming in the Rocky Mountain region.

This Zacks Rank #1 company has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for its current-year earnings has increased 26.7% over the past 30 days. The stock price has soared 55.7% year to date.

Citizens Financial (NYSE:CFG) Group Inc. CFG operates as the bank holding company for Citizens Bank, National Association that provides retail and commercial banking products and services in the United States. It operates in two segments, Consumer Banking and Commercial Banking.

This Zacks Rank #1 company has an expected earnings growth rate of 53.5% for the current year. The Zacks Consensus Estimate for the current year has improved 13.1% over the past 30 days. The stock price has rallied 21% year to date.

The Goldman Sachs Group Inc (NYSE:GS).'s GS key source of earnings stability is its business diversification. Within traditional banking, a diversified product portfolio has better chances of sustaining growth than many other banks, which have exited some of these areas. It operates in four segments: Investment Banking, Global Markets, Asset Management, and Consumer & Wealth Management.

This Zacks Rank #2 company has an expected earnings growth rate of 15.8% for the current year. The Zacks Consensus Estimate for the current year has improved 8.2% over the past 30 days. The stock price has climbed 19.9% year to date.

Axon Enterprise (NASDAQ:AXON) Inc. AXON develops, manufactures, and sells conducted energy weapons worldwide. It operates through two segments, TASER and Software and Sensors. This Zacks Rank #2 company has an expected earnings growth rate of 15.8% for the current year. The Zacks Consensus Estimate for the current year has improved 1.5% over the past 30 days. The stock price has jumped 38.8% year to date.

Caterpillar Inc (NYSE:CAT). CAT manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives worldwide. This Zacks Rank #2 company has an expected earnings growth rate of 21.3% for the current year. The Zacks Consensus Estimate for the current year has improved 4.5% over the past 30 days. The stock price has appreciated 19.3% year to date.

The Scotts Miracle-Gro Co Inc. SMG manufactures, markets and sells consumer lawn and garden products in the United States and internationally. The company operates through three segments: U.S. Consumer, Hawthorne and Other.

This Zacks Rank #1 company has an expected earnings growth rate of 21% for the current year (ending September 2021). The Zacks Consensus Estimate for the current year has improved 6.2% over the past 30 days. The stock price has risen 13.3% year to date.

Eastman Chemical Co. EMN operates as an advanced materials and specialty additives company worldwide that manufactures and sells chemicals, plastics and fibers. This Zacks Rank #2 company has an expected earnings growth rate of 28.1% for the current year. The Zacks Consensus Estimate for the current year has improved 7.9% over the past 30 days. The stock price has advanced 13.2% year to date.

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