Cyclical stocks follow the ups and downs of the economy, and while most companies are at least somewhat affected by broader economic forces, the difference varies considerably. Sales of food, beverages and cleaning products, for example, tend to be quite insulated from
recessions. By contrast, when the economy tanks, cyclical stocks fare the worst.
If it has too much debt, a cyclical company may even fall into bankruptcy during a downturn, which came to the forefront in 2020 during the COVID-19-induced economic stoppage. Industries such as travel and transportation, hospitality and energy saw their revenues plummet. This year, however, the economy quickly recovered, boosting cyclical stocks' fortunes. It's not too late to buy into the area, though. A new variant of the COVID-19 virus, omicron, led to sharp selling around Thanksgiving, particularly in a few key cyclical sectors. Here are seven cyclical stocks to pick up on the dip:
1. Exxon Mobil Corp. (ticker: XOM). The Thanksgiving sell-off centered on the
energy sector. The price of crude oil plunged more than 10% in a single day, marking one of the worst one-day performances for the commodity in its history. The price of oil had been up sharply in 2021, based around economic reopening and the inability of producers to get new supplies into the market.
However, the threat of more travel restrictions and stay-at-home orders crashed the party for oil. With it, major players like Exxon Mobil gave back a sizable chunk of their gains. However, it seems people may have overreacted and oil has already bounced following the Black Friday plunge. Meanwhile, Exxon trades for under 11 times forward earnings and is paying a 5.9% dividend yield.
2. Valero Energy Corp. (VLO). Like Exxon Mobil, Valero is strongly tied to the health of the overall economy. In some ways, Valero is even more of a cyclical operator. Whereas an integrated oil major like Exxon earns money from a variety of sources, a refiner like Valero profits largely from the demand for end products such as gasoline, heating oil, jet fuel and asphalt. During demand shocks, however, that margin can turn negative, leaving refiners in trouble.
On the flip side, if supply abruptly falls, for example during a hurricane in the Gulf Coast, refiners make windfall profits. Right now, traders are worried that the omicron variant will cause a big dip in the consumption of gas and jet fuel. If vaccines and other containment measures can handle omicron, however, that fear would be misguided. In the meantime, Valero shares trade at just 11 times forward earnings and offer a 5.9%
dividend yield.
Click here to continue reading.
No comments:
Post a Comment