In this article, we discuss 10 best cyclical stocks for inflation. If you want to skip reading about the performance of cyclical stocks during different economic cycles, you can go directly to 5 Best Cyclical Stocks for Inflation.
Cyclical stocks depend on the cycles of economic expansion and recession, which means they are expected to perform better during the economic expansion. During times of recession, a cyclical stock can lose its worth. However, they have a more significant growth potential during periods of expanding economy. Cyclical industries include restaurants, hotel chains, oil companies, airlines, furniture, high-end clothing retailers, and automobile manufacturers, among others.
40-year High Inflation in 2022
The world experienced a pandemic-induced recession in 2020. However, the world seemed to be on the road to recovery in 2021. In 2022, inflation reached a 40-year high of 7.9% in the United States by February. Further in May, the Consumer Price Index increased to 8.6% before seasonal adjustment. All items except for the food and energy index rose by 6.0% in May. The food and energy index rose by 1.2% and 4.1%, respectively. On top of that, according to Bloomberg, shelter inflation is expected to rise to 7.4% by September 2022.
One of the primary reasons for the current inflation is the Russia-Ukraine war that started in February 2022. The global oil prices hit their 14-year high of $130 WTI, and the price of food commodities also soared.
These price hikes can benefit some stocks because the cyclical business model allows the companies to transfer their costs to their consumer base. Exxon Mobil Corporation (NYSE:XOM), Pioneer Natural Resources Company (NYSE:PXD), and KLA Corporation (NASDAQ:KLAC) are some companies that are set to benefit from the current economic condition.
After a careful assessment of companies with cyclical business models, we have made a list of 10 companies that are most likely to benefit from the current inflation period. The companies were chosen according to the analyst ratings, expansion prospects, and financials, including cash flows, debt position, and dividend history.
The hedge fund sentiment was taken from the list of 912 hedge funds tracked by Insider Monkey at the end of Q1 2022.
Best Cyclical Stocks for Inflation
10. EPR Properties (NYSE:EPR)
Number of Fund Holders: 25
EPR Properties (NYSE:EPR) is an American REIT that invests in entertainment properties such as amusement parks, movie theatres, and ski resorts. As of 2022, the company has more than 350 properties, 94% of which are experiential. Being a “triple net” REIT, EPR Properties (NYSE:EPR) doesn’t have the burden of operating costs such as property taxes, insurance, and maintenance. These costs fall upon the tenants.
Despite the macroeconomic conditions, EPR Properties (NYSE:EPR) is going through with its expansion plans. As of March 2022, the company had $323.8 million in cash and $1.0 billion through an unsecured revolving credit facility, some of which was used to acquire two new experiential properties in Canada for a combined value of $142 million. The properties include Vacances Valcartier Resort Quebec and the Calypso Waterpark in Ottawa. The company plans to lease the properties to Premier Park Ltd in a long-term, triple net lease.
EPR Properties (NYSE:EPR) has an attractive dividend yield of about 6.5% as of July 19. Moreover, the dividend is paid monthly instead of quarterly. Its latest monthly dividend of $0.275 was paid out on July 15 to the shareholders of record on June 29.
In the first quarter of 2022, Millennium Management increased its holdings in EPR Properties (NYSE:EPR) by 7% and was the largest shareholder in the company with a stake of $42.59 million. In the same quarter, 25 hedge funds had bullish positions in the company compared to 22 funds in Q4 2021.
EPR Properties (NYSE:EPR), along with Exxon Mobil Corporation (NYSE:XOM), Pioneer Natural Resources Company (NYSE:PXD), and KLA Corporation (NASDAQ:KLAC), are some of the best cyclical stocks for inflation.
9. Vale S.A. (NYSE:VALE)
Number of Hedge Fund Holders: 27
Vale S.A. (NYSE:VALE) is a Brazilian minerals and mining company. With the downward spiral in the iron and copper industries, the company is holding its ground regarding shareholder returns. During Q1 2022, Vale S.A. (NYSE:VALE) paid out $3.5 billion in dividends and made share repurchases worth $1.8 billion. The dividend yield was approximately 4.1% and with 2.1% in buybacks, the returns sum up to more than 6%.
On May 6, Vale S.A. (NYSE:VALE) made a long-term deal with Tesla, Inc. (NASDAQ:TSLA) to supply low-carbon nickel. This deal will solidify the company’s position in the growing EV industry. Moreover, on June 9, the company announced that it had completed its studies to potentially initiate nickel sulfate operations in Canada. The expected capacity per annum is around 25,000 tonnes. In addition, Vale S.A. (NYSE:VALE) plans to make a capital expenditure of $5.8 billion in 2022, including the Serra Sul project, which is expected to add 20 million tonnes per year to the S11D mine’s 90 million tonnes capacity. The company is also looking forward to cutting costs by investing in solar energy projects such as the Sol do Cerrado project.
On June 7, Jefferies analyst Christopher LaFemina raised Vale S.A. (NYSE:VALE)’s price target from $17 to $24 and upgraded the company shares to Buy from Hold. According to the analyst, the industry is undervalued and will likely outperform when China recovers.
Here is what Grantham Mayo Van Otterloo & Co. LLC had to say about Vale S.A. (NYSE:VALE) in its first-quarter 2022 investor letter:
“Let’s look at Vale (NYSE:VALE), the world’s largest iron ore producer, as a case study for how shareholders can be rewarded. Vale’s stock price is about where it was at the beginning of last year. Despite the market’s lack of enthusiasm, the company generated about $20 billion of free cash flow last year. Not bad for a company with a market cap of a little over $100 billion and no substantive debt as of the end of March. 4 What did the company do with all that cash? Last year, Vale paid out about $9 billion in regularly scheduled dividends and distributed another $10 billion between extra dividends and share repurchases. Combined with dividends distributed in the first quarter of this year and a recently announced share repurchase, Vale has returned or announced the return of over $33 billion since the beginning of last year, almost a 32% yield relative to the market cap of the company. Not a bad way to win.”
8. A. O. Smith Corporation (NYSE:AOS)
Number of Hedge Fund Holders: 38
A. O. Smith Corporation (NYSE:AOS) is an American company that manufactures commercial and residential water heaters and boilers. Moreover, the company also offers water treatment products in the Asian markets, including India and China.
A. O. Smith Corporation (NYSE:AOS) has a dividend yield of 2% and has an active share buyback program. The company repurchased shares worth $107.9 million in the first quarter of 2022 alone. Moreover, A. O. Smith Corporation (NYSE:AOS) plans to make share repurchases of close to $400 million by the end of 2022. It is a decent amount keeping in mind that it is a midcap company with a market capitalization of around $9 billion. The PE ratio of the company is 17.62, which makes it reasonably valued. The latest quarterly dividend of $0.28 was declared on April 11 and paid out on May 16 to the shareholders of record as of April 28.
According to our database, 38 hedge funds were bullish on A. O. Smith Corporation (NYSE:AOS) in the first quarter of 2022 compared to 28 in the previous quarter, showing a positive sentiment towards the company.
7. Hess Corporation (NYSE:HES)
Number of Hedge Fund Holders: 40
Hess Corporation (NYSE:HES) is an American midstream oil and gas company. The company has exploration and production operations in the USA, Libya, parts of South America, and Southeast Asia. According to the Insider Monkey database, 40 hedge funds had a stake worth $1.43 billion in the company in the first quarter of 2022, compared to 36 in the previous quarter, valued at $869.1 billion. In Q1 2022, Fisher Asset Management held the most significant stake with 4.2 million shares worth $449.69 million.
As of July 19, Hess Corporation (NYSE:HES) stock was up by 32.5% YTD. The company had healthy Q1 2022 results by exceeding the EPS estimates of $1.13 after posting an EPS of $1.30. Furthermore, the company recorded a revenue of $2.37 billion compared to the estimates of $2.01 billion. As of March 31, Hess Corporation (NYSE:HES) had $1.4 billion in cash and $2.4 billion in near-term debt maturities. In addition, the cash flow from operations is expected to grow by 25% CAGR from 2022 to 2026. Lastly, Hess Corporation (NYSE:HES) has pledged to return up to 75% of its annual adjusted cash flow through dividends and share repurchases.
On June 13, Barclays analyst Jeanine Wai raised Hess Corporation (NYSE:HES)’s price target from $131 to $153 and maintained an Overweight rating on the company shares. The analyst believes the oil and gas stocks will remain profitable after Barclays updated the oil price forecast by $11 and $23 higher for 2022 and 2023, respectively.
6. Suncor Energy Inc. (NYSE:SU)
Number of Hedge Fund holders: 41
Suncor Energy Inc. (NYSE:SU) produces synthetic crude oil from Canada's oil sands, the world’s largest crude oil deposit. The oil sand reserves are expected to last for 28 more years. In the coming year, the company plans to pay out approximately $2.1 billion in dividends, and it has $6 billion of free cash flow.
Suncor Energy Inc. (NYSE:SU) is making phenomenal returns to its investors in 2022. As of July 19, the stock is up by 22% YTD. Moreover, near the end of 2021, the company announced a 100% dividend raise and a robust share repurchase program. Furthermore, the company reduced its net debt from $18 billion in 2019 to $14 billion in 2021. In the first quarter of 2022, the net debt was further reduced by $730 million. According to CEO Mark Little, the company will direct all the free cash flow to shareholder returns once the net debt goes down to $9 billion.
On June 16, National Bank analyst Travis Wood raised his price target on Suncor Energy Inc. (NYSE:SU) to $73 from $54 while maintaining a Sector Perform rating.
Suncor Energy Inc. (NYSE:SU) is a significant part of our list of cyclical stocks for inflation. Other prominent names include Exxon Mobil Corporation (NYSE:XOM), Pioneer Natural Resources Company (NYSE:PXD), and KLA Corporation (NASDAQ:KLAC).
“Also within the structural bucket, we added to our commodity exposure with the purchase of Suncor Energy (NYSE:SU). Suncor, a past holding, is a Canadian integrated oil company where we capitalized on attractive valuation due to a COVID-19-induced slowdown. We expect recovery in oil demand and strong pricing will result in faster than expected free cash flow growth and financial deleveraging.
The structural bucket has the shortest investment horizon across the spectrum of growth companies we target in the Strategy. We closely monitor the macro impacts and turnaround progress of these companies and will be disciplined sellers when the thesis for a holding plays out.”
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Disclosure: None. 10 Best Cyclical Stocks for Inflation is originally published on Insider Monkey.