Top 5 cyclical stock picks for October 2021

Highlights

  • The performance of cyclical stocks is dependent on the economic health or stages in the business cycle.
  • Most cyclical stocks belong to companies that are engaged in sales of non-essential consumer discretionary goods and services such as entertainment, travel, automobile, construction, and luxury.
  • Intercontinental Hotels Group Plc, Burberry Group Plc, Rolls-Royce Holdings Plc, Rio Tinto Plc, and International Consolidated Airlines Group S.A, 5 cyclical stocks being discussed here.

The performance of cyclical stocks depends on the economic health or stages in the business cycle. Their inherent volatility provides opportunities for speculation based on rising and falling market conditions. During periods of economic prosperity and high employment, cyclical stocks are expected to rise in price, and during a recession, contracting business activity and falling employment rates, stocks are expected to decline. Most cyclical stocks belong to companies engaged in sales of non-essential consumer discretionary goods and services such as entertainment, travel, automobile, construction, and luxury.

Largescale vaccination program rollouts, reopening of the economy, and relaxation in COVID-19 restrictions in the UK and globally presents an optimistic outlook for a strong, post-pandemic economic recovery. Cyclical stocks have now begun to outperform the broader market in anticipation of the pandemic nearing an end.

Top cyclical stocks

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Here we take a detailed look at the top five cyclical stocks to be considered in October 2021.

International Consolidated Airlines Group S.A. (LON: IAG)

International Consolidated Airlines Group (IAG) is one of the leading airline groups in the world. The company’s passenger capacity in Q2 ended 30 June 2021 was 21.9% of 2019 levels, affected by the COVID-19 pandemic along with government-imposed restrictions and quarantine requirements.

Its passenger capacity plan for Q3 2021 is estimated at around 45% of 2019 capacity on account of the reopening of some travel borders, rising vaccination rates, and relaxations in COVID-19 related restrictions. IAG’s cargo-only flights operated in Q2 was 1,371, an increase from 1,306 in Q1 2021.

IAG recorded cash of €7.7 billion as of 30 June 2021, representing an increase from €1.7 billion as of 31 December 2020. The company’s total revenues though declined by 58.2% year-on-year from €5,288 million in H1 2020 to €2,212 million in H1 2021.

Rio Tinto Plc (LON: RIO)

Rio Tinto is a mineral exploration, mining and processing company. In August, the company restarted operations at Richards Bay Minerals (RBM) in South Africa, following the stabilisation of the security situation.

Government stimulus in response to the COVID-19 pandemic helped in maintaining demand for Rio Tinto’s products during the constrained supply scenario and rising prices. Rio Tinto registered a 143% year-on-year growth from US$5,628 million in H1 2020 to US$13,661 million in H1 2021. Its net cash as of 30 June 2021 was $3,140 million compared to debt of $664 million as of 31 December 2020.

Rio Tinto had announced an interim dividend of 270.84 pence per share. It also declared a special dividend of 133.26 pence per share to shareholders for H1 2021.

Rolls-Royce Holdings Plc (LON: RR.)

Rolls-Royce Holdings is an international aerospace and defence company engaged in designing, manufacturing and distributing power systems. Recently, it agreed to sell 100% of ITP Aero to a consortium led by Bain Capital Private Equity for €1.7 billion. The agreement was aimed to restructure its balance sheet. It sold a 23.1% stake in AirTanker Holdings to Equitix Investment Management for £189 million.

Rolls-Royce recorded an underlying operating profit of £307 million in H1 2021, up from a loss of £1,630 million in H1 2020 during the pandemic. The company’s free cash flow improved from a loss of £2,862 million in H1 2020 to a loss of £1,174 million in H1 2021.

Burberry Group Plc (LON: BRBY)

Burberry is a UK-based luxury fashion house that designs and sells ready-to-wear clothing, leather goods, accessories, and cosmetics.

Burberry’s retail revenue for the quarter ended 26 June 2021 rose to £479 million, representing an increase of 86% year-on-year compared to £257 million in the same period in 2020. The company was hit by the pandemic as consumers delayed all non-essential and luxury purchases during the period.

Burberry’s FY22 guidance for wholesale is estimated to increase by about 60% year-on-year in H1 on strong order book and Forex.

Intercontinental Hotels Group Plc (LON: IHG)

InterContinental Hotels Group is an international hospitality company based in the UK. Recently, it collaborated with Josh.ai for the creation of a voice-controlled smart room at its California-based Kimpton Rowan hotel.

For H1 2021 ended 30 June 2021, IHG’s revenues from reportable segments rose by 16% year-on-year to $565 million from $488 million in H1 2020. Its operating profit from reportable segments reached $188 million in H1 2021, up by 262% year-on-year and down by 54% compared to 2019.

The company registered an improvement in trading in H1 2021, driven by recuperating travel demand, rising vaccine rollouts, easing of restrictions, and rebuilding of economic activity.  With the occupancy rate continuing to improve, about 50% of the group’s hotels achieved RevPAR above 2019 levels in July 2021.

Bottomline

Investment in cyclical stocks may be risky when compared to general stocks. Volatility can be significant here, while income investors may often want to invest in stocks that offer steady returns. Additionally, timing is another factor that is to be borne in mind while investing in cyclical and thus requires investors to keep a close watch on market conditions while investing in these stocks.

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