Cyclical stocks refer to shares of companies that typically witness business declines during economic downturns and thrive in an economy’s recovery or expansionary phase. The finance, energy, and industrial sectors are some of the cyclical sectors that are heavily dependent on economic conditions. Conversely, sectors such as healthcare and consumer staples are not heavily dependent on the economic conditions thanks to the inelastic nature of demand for their products and services.
Naturally, the reopening of the economy, improving job market, and rising Treasury yields are all favorable for cyclical stocks. However, the expectation of an economic recovery this year led to many investors earlier this year to take positions in the potential winners of the recovering economy. So, while most cyclical stocks could witness upside from their current levels, it’s hard to find those that have plenty of room to run.
But, McDonald’s Corporation (MCD), Costco Wholesale Corporation (COST), and Sysco Corporation (SYY) have yet to return to their pre-pandemic business volume, as “new normal” restrictions are still hampering their operations. However, we think that once these restrictions are eased further, and with continued success by the mass vaccination drive, these stocks could climb much higher than the other cyclical stocks based on growing business and rising investor attention.
McDonald’s Corporation (MCD)
MCD, a leading global foodservice retailer, operates and franchises approximately 39,000 McDonald’s restaurants worldwide. Its target markets include primarily the United States and international lead markets, high growth markets, foundational markets and corporates.
Earlier, in November, MCD announced a new growth strategy, Accelerating the Arches. As part of this strategy, the company is focused on updating its actions and behaviors and growth pillars by leveraging its competitive advantage. This should help MCD increase its market reach and customer base.
Against an uncertain backdrop regarding franchisees and restaurant operations, MCD delivered its strongest quarter of the year, recovering nearly 99% of fourth quarter 2019 global comparable sales. MCD reported revenues of $5.31 billion in the fourth quarter, ended December 31, 2020. Its global comparable sales improved sequentially, reflecting positive comparable sales in the U.S. of 5.5%. It reported a net income of $1.38 billion, with an EPS of $1.84.
Analysts expect MCD’s EPS to rise 21.8% year-over-year to $1.79 in the current quarter, ending March 31, 2021. A consensus revenue estimate of $5.02 billion for the current quarter represents a 6.4% rise year-over-year. The stock has gained 5% year-to-date.
2024 STOCK MARKET OUTLOOK
MCD’s strong fundamentals are reflected in its POWR Ratings . The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. MCD also has a grade of A for Quality along with a B for Momentum, Stability, and Sentiment. In the B-rated 46-stock Restaurants industry, it is ranked #13.
In total, we rate MCD on eight different levels. Beyond what we stated above, we also have given MCD grades for Growth and Value. Get all MCD’s ratings here.
Costco Wholesale Corporation (COST)
Based in Washington, COST is a worldwide operator of membership warehouses and e-commerce websites. The company offers merchandise in various categories, which include foods, sundries, hardlines, fresh foods, soft lines, and others.
Comparable sales growth has been the primary driver of COST’s profitability in its last reported quarter. Its net sales include core merchandise categories, warehouse ancillary and other businesses. For the fiscal second quarter, ended February 14, 2021, COST’s net sales have increased 14.6% year-over-year to $44.77 billion, driven mainly by a 13% increase in comparable sales and sales at 18 net new warehouses opened since the end of the second quarter of 2020, along with rising sign ups at warehouses. Its operating income has risen 5.8% from its year-ago value to $1.34 billion, while its EPS has improved 1.9% to $2.14.
Analysts expect COST to report EPS of $2.23 in the current quarter (ending May 2021), up 18% year-over-year. A consensus revenue estimate of $42.14 billion for the current quarter represents a 13.5% improvement from its year-ago value. The stock has gained 23.8% over the past year.
It’s no surprise that COST has an overall B rating, which translates to a Buy in our POWR Ratings system. In the A-rated Grocery/Big Box Retailers industry, it is ranked #21 of 40 stocks.
The POWR Ratings also assess stocks based on different categories. Click here to see the additional POWR Ratings for COST (Quality, Growth, Sentiment, Momentum, Value and Stability).
Click here to checkout our Retail Industry Report for 2021
Sysco Corporation (SYY)
SYY is the global leader in selling, marketing and distributing food products to restaurants, healthcare and educational facilities, lodging establishments, and other customers. The company’s segments consist of U.S. Foodservice Operations, International Foodservice Operations, SYGMA and Other.
On February 15, SYY launched nine exclusive and innovative chef-tested menu concepts through its Cutting Edge Solutions platform. These new and differentiated products are expected to provide foodservice operators with unique menu offerings, innovative meal solutions and environmentally friendly cleaning and beverage products.
On March 11, Guest Supply, a SYY subsidiary, partnered with Corsicana Mattress Company to introduce its Contourest Copperbed self-sanitizing antimicrobial and antibacterial mattresses for the hospitality and higher education marketplaces. These mattresses are expected to attract many potential customers.
With a business recovery in sight, SYY is making bold progress in its transformation agenda, while preparing for an anticipated coming increase in demand. Despite the complex business climate, SYY reported net sales of $11.60 billion in the second quarter ended December 26, 2020. It has also reported net earnings of $85.90 million, with an EPS of $0.17. Its free cash flow for the 26-week period ended December 26, 2020 has increased 112.2% year-over-year to $788.24 million.
Given its industry-leading financial strength and ability to invest in inventory, staffing and service levels, analysts expect SYY’s EP to grow at a CAGR of 22.9% over the next five years. The stock has gained 86.3% over the past year.
SYY’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to Buy in our proprietary rating system. SYY also has a B grade for Growth, Momentum, Quality, and Value. It is currently ranked #8 of 81 stocks in the B-rated Food Makers industry.
In total, we rate SYY on eight different levels. Click here to see the additional POWR Ratings for SYY (Stability and Sentiment).
The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
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MCD shares were trading at $228.92 per share on Monday afternoon, up $3.71 (+1.65%). Year-to-date, MCD has gained 7.34%, versus a 9.05% rise in the benchmark S&P 500 index during the same period.
About the Author: Rishab Dugar
Rishab is a financial journalist and investment analyst. His investment approach is to focus on quality stocks, trading at low prices, with business models that he readily understands. More...
More Resources for the Stocks in this Article
| Ticker | POWR Rating | Industry Rank | Rank in Industry |
| MCD | Get Rating | Get Rating | Get Rating |
| COST | Get Rating | Get Rating | Get Rating |
| SYY | Get Rating | Get Rating | Get Rating |
As a seasoned financial analyst and investment enthusiast, I have dedicated years to understanding the intricacies of the stock market and have closely followed the trends in various sectors. My insights are based on a comprehensive analysis of financial data, market dynamics, and industry trends. Let's delve into the concepts discussed in the article and provide further information on each:
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Cyclical Stocks:
- Definition: Cyclical stocks refer to shares of companies that tend to experience business declines during economic downturns but thrive during periods of economic recovery or expansion.
- Examples: Sectors such as finance, energy, and industrial are considered cyclical as their performance is heavily dependent on economic conditions.
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Non-Cyclical Stocks:
- Definition: Sectors like healthcare and consumer staples are non-cyclical because demand for their products and services remains relatively stable regardless of economic conditions.
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Factors Favorable for Cyclical Stocks:
- Reopening of the Economy: The reopening of the economy is generally favorable for cyclical stocks.
- Improving Job Market: A positive job market is an indicator of economic recovery, benefiting cyclical sectors.
- Rising Treasury Yields: Higher yields can attract investors to cyclical stocks.
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McDonald’s Corporation (MCD):
- Business Overview: MCD is a global foodservice retailer with approximately 39,000 restaurants worldwide.
- Recent Strategy: Introduced a growth strategy called "Accelerating the Arches" in November.
- Financial Performance: Strong recovery in the fourth quarter of 2020, with 99% of global comparable sales recovered.
- Analyst Expectations: Expected EPS growth of 21.8% year-over-year.
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Costco Wholesale Corporation (COST):
- Business Overview: COST is a worldwide operator of membership warehouses and e-commerce websites.
- Financial Performance: Significant comparable sales growth in the fiscal second quarter of 2021.
- Analyst Expectations: Expected EPS growth of 18% year-over-year in the current quarter.
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Sysco Corporation (SYY):
- Business Overview: Global leader in selling, marketing, and distributing food products to various sectors.
- Recent Developments: Launched exclusive and innovative menu concepts, and partnered to introduce self-sanitizing mattresses.
- Financial Performance: Strong recovery with net sales of $11.60 billion in the second quarter of 2020.
- Analyst Expectations: Expected EP growth at a CAGR of 22.9% over the next five years.
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POWR Ratings:
- Definition: POWR Ratings provide a comprehensive assessment of a stock based on 118 different factors, categorized into eight levels.
- McDonald’s (MCD) Ratings: Overall B rating, indicating a Buy. A-rated in Quality, B-rated in Momentum, Stability, and Sentiment.
- Costco (COST) Ratings: Overall B rating, translating to a Buy. A-rated in the Grocery/Big Box Retailers industry.
- Sysco (SYY) Ratings: Overall B rating, signifying a Buy. A-rated in Growth, Momentum, Quality, and Value.
In conclusion, the article highlights the potential for growth in cyclical stocks, with a focus on specific companies like McDonald’s, Costco, and Sysco. The analysis considers recent financial performance, strategic initiatives, and analyst expectations to provide a comprehensive view of each company's outlook.
