Insider Monkey
15 Undervalued Cyclical Stocks to Buy Now
Ramish Cheema
10 min read

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In this piece, we will take a look at 15 undervalued cyclical stocks to buy now according to Wall Street analysts. If you want to skip our primer of cyclical stocks and the economy in general, then skip ahead to 5 Undervalued Cyclical Stocks To Buy Now.

Stocks are divided into several categories and these primarily segregate them on the basis of industry. However, two categories classify stocks according to economic conditions. These are discretionary or cyclical stocks, and defensive stocks.

These two categories list down companies whose fortunes either rise with the income that consumers have to spend or their ability to withstand economic slowdowns and resist a drop in purchasing power. Cyclical stocks are those that tend to do well when the economy is doing well and people have more money to spend. These generally include luxury goods companies such as jewelers, airlines, and restaurants. The logic goes that as people see their incomes rise in a growing economy and inflation remains low, they have more money to spend on luxury and naturally, cyclical stocks go up as a result.

The other category, namely consumer defensive stocks, are those that are deemed too essential for daily living for people to skip out on even if the economy is slowing down. The rather cynical take surrounding them is that people cannot afford to skip out on buying essentials such as food and medicines even if their income is dropping. Naturally, this leads to defensive stocks being better off in share price performance in an era of slow economic growth. One of the most notable examples of a consumer defensive stock is Walmart Inc. (NYSE:WMT), whose low cost business model tends to attract consumers when their incomes drop.

Today's high interest rate environment is one that is designed to benefit defensive stocks when we take an intuitive approach. After all, high rates slow down the economy and lead to poorer economic outcomes for most people. Yet, the current turmoil in the U.S. economy is rather historic in nature. 2022 was one of the worst years for the American consumer as high inflation, due to factors such as the $5 a gallon price for gasoline, squeezed consumer budgets dry. This left them with less discretionary income to make purchases and created a slow economic environment as purchases were instead redirected to essentials.

But 2023 is proving to be a different economic landscape. Inflation in the U.S. currently sits at 3.2% which is significantly lower than the peak reading of 9.1% in June 2022. This drop in inflation frees up more money that people have to spend on luxury, and combined with the fact that the economy continues to grow, it can provide some stimulus to cyclical stocks despite the multi decade high interest rates right now. As any seasoned investor would tell you, investing is more about future expectations instead of current trends, as markets often react to potential future developments. As an example, it's a sure bet that the S&P 500 will fall should the Federal Reserve's Chairman Jerome Powell surprise investors and share that the bank will raise interest rates throughout 2024 due to unforeseen circumstances.

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