Investors are getting mixed signals on the state of the economy as we head into spring. On the one hand, investor concerns over inflation, deficit spending and certain Fed decisions continue to cause worry. Some economists fear that a rebound following the pandemic may not be as robust as previously predicted. Still others are betting that the U.S. economy is entering a period of boom.
Among those in the latter camp is Jamie Dimon, CEO of JPMorgan (NYSE:JPM), who wrote in his annual shareholder letter that “strong consumer savings, expanded vaccine distribution and the Biden administration’s proposed $2.3 trillion infrastructure plan could lead to an economic “Goldilocks moment” — fast, sustained growth alongside inflation and interest rates that drift slowly upward.”
Thus, investors who adhere to Dimon’s logic should naturally gravitate toward cyclical stocks. That’s because cyclical stocks correlate strongly with the cycles of the economy.
Investors betting on an American economic boom should consider these cyclical stocks:
- Nike (NYSE:NKE)
- McDonald’s (NYSE:MCD)
- Walt Disney (NYSE:DIS)
- Airbnb (NASDAQ:ABNB)
- TJX Companies (NYSE:TJX)
- Lululemon Athletica (NASDAQ:LULU)
- Delta Airlines (NYSE:DAL)
Cyclical Stocks: Nike (NKE)
Cyclical stocks correlate with discretionary spending. In stronger economic times, consumers spend more of their respective budgets on discretionary items such as apparel. This is very likely to lead to a boon for Nike.
The argument in favor of NKE stock being a strong bet against a recession is clear: Consumers will go out and buy Nike shoes and apparel as their confidence in the economy improves.
There is a good argument to be made that Nike should experience a real boost in its North America business. The company’s revenues have held quite steady over the course of the pandemic across its overall business. The business is divided into four divisions — North America, EMEA (Europe, Middle East & Africa), Greater China, and Asia Pacific & Latin America.
In the nine months that ended Feb. 29, 2020, Nike recorded $31.09 billion in revenues worldwide. In the same period, which ended Feb. 28, 2021, the company recorded $32.19 billion in revenues, a 4% increase.
However, Nike’s Greater China division was largely responsible for the positive results. Revenues grew 26% there. Sales dipped or remained flat elsewhere. North America saw a 4% decrease during the period.
This should change as consumers head out and buy Nike shoes, apparel, and equipment in a growing economy.
McDonald’s is a cyclical stock because it sits within the restaurant sector. The headwinds the company has faced in 2020 are obvious: The pandemic has significantly reduced traffic. More people are working home, so they aren’t stopping by McDonald’s drive-throughs in the morning. Restrictions on restaurant entry are another issue the company has faced.
That’s shown in the numbers. Revenues at company-operated locations decreased by 14%, while franchised restaurant revenues dropped by 8%. Total revenues decreased by 10% during 2020. The knock-on issues that affected operations led to net income decreasing by 21% throughout 2021.
But as the U.S. bounces out of the pandemic there are strong tailwinds in McDonald’s favor. As a cyclical restaurant stock, it is in position to rise. Further, as more and more people receive vaccines and life normalizes, McDonald’s is sure to see an increase in business.
Target prices are higher than current prices which is a good signal for investors. Further, analysts consider MCD stock to be overweight.
Walt Disney (DIS)
Disney makes a lot of sense right now. Consumers are itching for entertainment, and one of the places they will return to is Walt Disney parks. Consumers visit Disney parks more often in economic boom times under normal circumstances. These however, are not normal circumstances.
That’s actually a good thing for Disney because its parks suffered greatly during the pandemic. The result of an economic boom like Jamie Dimon predicts, along with lifted sanctions, is a real multiplier for DIS stock.
Disneyland Resort, in California, is opening its Avengers campus in early June which should only serve to boost the company. But the overall thrust is that families are going to flood in for multiple reasons under an economic boom.
Disney won’t release earnings again until May, 13, but investors should still note that the company performed well during the pandemic. The company has seen its parks segment get pummeled. Through the quarter that ended Jan. 2, parks recorded an operating loss of $119 million. During the same period in the year prior, parks recorded operating income of $2.52 billion. Yet, DIS stock was bolstered by the performance of other assets. including Disney+ which saw rapid growth.
So, a booming economy makes DIS stock a strong bet.
The hotels and lodging industry is one that always suffers during a weak economy. People don’t travel as often as purse strings tighten, thus revenues decline. The opposite is true in strong economic times of course.
Investors are already well-aware of this phenomenon. In the recent pivot into cyclical stocks, they’ve run up the prices of some lodging stocks; Marriott International (NASDAQ:MAR) sits close to pre-pandemic prices, Wyndham Hotels (NYSE:WH) as well.
Wall Street remains hesitant on ABNB stock. But there’s a case to be made that it really makes a lot of sense. Gross bookings declined to $23.5 billion in 2020 from $38 billion in 2019. They will of course rebound due to vaccine distribution and the lifting of sanctions. This will lead to an increase in bookings which will naturally increase in a strong economy. Again, somewhat of a compounding of tailwinds.
ABNB was a contentious stock when it had its initial public offering in December. Investors have wondered what to make of its investment case ever since. The pandemic compounds the difficulty. Nevertheless, it is a good bet against a recession.
TJX Companies (TJX)
TJX Companies includes names like TJ Maxx, Marshall’s, Home Goods and Sierra. TJX stock is a strong bet against a recession because apparel and home fashion are strong cyclical sector components.
A strong economy is one which is reopened. For TJX, that is an improving situation. Throughout 2020, TJX saw closures across all of its stores during 24% of store days. During the fourth quarter, that number decreased to 13%, so the company is headed in the right direction. And the theory goes that an opened economy is going to be a booming one, so TJX stock benefits as a discretionary, cyclical stock.
TJX stores which have remained open didn’t see a massive decline during the pandemic. In the latest quarter, such stores only lost 3% in sales; in the entire year, 4%. Those figures become much worse in consideration of the aforementioned closures. In the latest quarter sales are down 10.35%. On the year, nearly 23%.
TJX stock is a strong bet that a recession does not occur. As a result consumers should bolster it by increasing discretionary spending on clothing and home goods.
Lululemon Athletica (LULU)
LULU stock benefits from a similar narrative to that for Nike. Sporting apparel booms along with economies. In Lululemon’s case the company is already doing well. During the most recent quarter revenues increased 24%, to $1.7 billion. While revenues increased a strong 21% in North America, they rose a much sharper 47% internationally.
And the company performed strongly throughout the worst of the pandemic as well. Revenue increased 11% in 2020. The company witnessed an 8% revenue increase in North America, and 31% internationally.
Lululemon’s management gave strong guidance in its recent earnings report: “For fiscal 2021, we expect net revenue to be in the range of $5.55 billion to $5.65 billion. Diluted earnings per share are expected to be in the range of $6.10 to $6.25 for the year and adjusted earnings per share are expected to be in the range of $6.30 to $6.45.”
The company is doing very well and should trend upward if and when a strong economy emerges.
Delta Airlines (DAL)
There has been a rush into airline stocks over the past six weeks. As a result, the strongest performers in the sector are already bid up. I’d recommend Southwest Airlines (NYSE:LUV) if that weren’t the case. But the fact is LUV stock is above where it was trading prior to the pandemic. That means investors think it is now more valuable even though the pandemic crushed its revenues. The logic seems flawed to me.
Nevertheless, airlines are a strong cyclical bet against a recession. People will be travelling in droves in a stronger economy.
Being that that is the case, Delta Airlines makes sense right now. DAL stock is 15% below pre-pandemic trading prices as I write this. The company got crushed just as Southwest did.
But it was making strides forward in improving its service and business structure before the pandemic sent the entire industry into a tailspin.
Delta’s scheduled capacity is still down 35% in Q1 2021, and total revenues are anticipated to be down 60-65% in the same period. But the company will pop up in a strong economy because a strong economy will be an open one.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.