Inflation is one of the biggest threats facing the economy, although there is increasing evidence that it is rolling over. We can see this by looking at commodity prices or weakness in economic reports.
As long as the economy is slowing, cyclical stocks are likely to underperform. Therefore, investors who are interested in this sector need to be even more selective when it comes to stock picking and should consider a dollar-cost-average method to take advantage of continued volatility.
One profitable strategy during this period of high inflation is to focus on stocks that have pricing power, as these companies’ margins will continue to expand. In contrast, stocks without pricing power are likely to underperform as margin compression erodes EPS. Therefore, investors should consider buying these 3 high-quality, cyclical stocks: Olin (OLN), Nucor (NUE), and Chemours (CC).
OLN produces and sells chemical products in the United States, Europe, and globally. It operates in three segments: Chlor Alkali Products and Vinyls; Epoxy; and Winchester. The company markets its products through its sales personnel as well as directly to various industrial clients, mass merchants, retailers, wholesalers, other distributors, and the United States Government and its prime contractors.
OLN is a great pick for an inflationary environment because its chemicals are used in all sorts of industrial processes. This gives it pricing power as its customers have no choice but to accept higher prices. Further, OLN has a dominant market share in many categories which means that it’s benefitting from a strong industrial recovery.
Another indication of its strength is found in its recent earnings report with the major highlight being the company’s authorization of a $1 billion buyback. It also saw a 63% year over year increase in revenue. Net income had a major turnaround going from a loss of $736.8 million in last year’s Q3 to a profit of $390.7 million this year.
Its outlook remains bright as analysts are expecting the company’s full-year EPS to reach $8.64 which implies a forward P/E of 5.7. EPS should also get another lift from the buyback program which is accretive by about 12%.
OLN’s POWR Ratings reflect this promising outlook. The company has an overall A rating, which translates to Strong Buy in our proprietary rating system. A-rated stocks have posted an average annual performance of over 30%. To see the complete POWR Ratings for OLN, click here.
TX manufactures, sells, and distributes steel. It’s currently one of the largest steel companies in the world and operates through two segments–Steel and Mining. The Luxembourg-based company also provides financial, social, and engineering services.
Steel companies are also likely to outperform in the current environment. The major factor is that construction activity, infrastructure spending, and industrial production are all expanding at a rapid rate and are projected to remain strong over the next few years. Further in an inflationary environment, a steel company’s assets also appreciate in value as the cost of building new production also increases. Further as a provider of inputs, it also tends to have more pricing power.
These positives are evident in TX’s recent earnings report as its profit margins reached 23% which is a significant improvement from its pre-pandemic 5% profit margin. The company also reported 115% revenue growth. It also had an incredible spike in earnings from $0.72 per share last year to $6.12 per share this year.
Further, earnings are expected to continue growing albeit at a slower pace. Despite this earnings growth, TX is quite cheap with a forward P/E of 4.2 which is significantly cheaper than the S&P 500’s forward P/E of 21. Wall Street is also bullish on the stock as 4 out of 6 analysts covering it have a Buy rating with a consensus price target implying nearly 40% upside.
TX’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Not surprisingly, the stock has a B for Growth and Value which isn’t surprising considering its low P/E and massive earnings growth. To see TX’s complete POWR Ratings, click here.
CC is a manufacturer and distributor of performance chemicals. The company is based in Wilmington, Delaware and is a spinoff of Dupont. It operates all over the world and has four major units: Titanium Technologies; Thermal & Specialized Solutions; Advanced Performance Materials; and Chemical Solutions.
Like OLN, CC will benefit from an inflationary environment as its chemicals are inputs for all types of products. However, one of its largest revenue sources is titanium dioxide which is a key ingredient for white paint. Therefore, CC is also connected to the housing industry.
Housing is one of the strongest parts of the economy, and there is no stopping its momentum due to favorable supply and demand dynamics. On the supply side, there are only about 300,000 homes listed for sales in the whole country. Additionally, demand is strong with 30% of Millennials interested in buying a home in the next few years which is a sharp increase from 17% last year. In part, this is a reflection of the strong labor market, rising wages, low rates, and strong household balance sheets. Such strong fundamentals also mean it’s likely we will see more home improvement and renovation projects which will also benefit CC.
These positive fundamentals were also reflected in CC’s recent earnings report which showed a 36% increase in revenue to $1.7 billion. The company’s gross profit increased 66.1% to $427 million, and net income surged 181.6% to $214 million. Overall, EPS grew by 176% to $1.27.
The company’s momentum is expected to continue with projections for $4.11 in full-year EPS, more than double last year’s figure. It also means shares are remarkably cheap with a forward P/E of 7.6 and a dividend yield of 2.9%.
CC’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to Strong Buy in our POWR Ratings system. The POWR Ratings also evaluates stocks by various components to give investors additional insight. The stock has an A for Quality which makes sense considering that Wall Street has a consensus price target of $43.29, implying 30% upside from current levels. Click here to see CC’s full POWR Ratings.
OLN shares fell $0.99 (-2.03%) in premarket trading Tuesday. Year-to-date, OLN has declined -15.26%, versus a -7.39% rise in the benchmark S&P 500 index during the same period.
NUE shares were unchanged in after-hours trading Wednesday. Year-to-date, NUE has declined -6.48%, versus a -18.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.3 High-Quality Cyclical Stocks to Buy for the Long-Term appeared first on StockNews.com