Investing in cyclical stocks, the stocks of companies whose fortunes go up and down with the economy or their respective industry, has been a winning strategy for 2017. The list of the top five cyclical stocks so far this year has a strong showing from the consumer goods and services, basic materials, and semiconductor industries.
Weight Watchers International (NYSE: WTW)
Scientific Games (NASDAQ: SGMS)
Tronox (NYSE: TROX)
Chemours (NYSE: CC)
Universal Display (NASDAQ: OLED)
And take a look at how the stocks have done so far this year. Their year-to-date returns run from 129% to 295%, compared to 16% for an exchange-traded fund tracking the S&P 500.
A big year for consumer services
According to data from the U.S. Census Bureau, total retail sales so far this year have increased 4% compared with spending in 2016. The confident consumer has led to big gains for select companies that cater to them.
One such company is Weight Watchers, which came under the sway of Oprah Winfrey a few years ago when she purchased a 10% stake and took a seat on the board of directors. The weight loss company has been riding her star power, reporting a 20% increase in year-over-year subscribers during its last quarter. Earnings per share were up 177% through June, making the company a leader thus far in share price return.
Gambling has been a similar story, rebounding along with the economy as people have more to spend. Scientific Games, a supplier of technology, systems, and services to the global gaming industry, has reaped benefits. Revenues are up on the year just shy of 6%, but that has translated into an 88% bump in operating income. The company is unprofitable, but management has been steadily getting things back in the black. Debt is being lowered, and the net loss narrowed in the last quarter to $39.1 million from $51.7 million a year ago.
Basic materials on the mend
The basic materials industry, companies that search for, mine, and process metals and chemicals, are cyclical as they are highly sensitive to changes in supply and demand. 2014 and 2015 were an especially rough patch, as material prices fell and materials producer stocks followed suit.
Tronox, a metals miner and inorganic chemical supplier, took a big hit during that period. The company has been on a tear ever since, though. Stock prices have more than doubled this year as revenue and bottom-line profit rebounded. A mere 16% increase in revenue in the last quarter equated to a $3 million profit compared with a $52 million loss in the prior-year period.
Chemours, spun off from what was then Dupont, now DowDuPont (NYSE: DWDP), during the worst of the basic materials downturn, has experienced similar returns. The diverse chemicals producer had a 15% revenue increase in its last quarter, good for a $161 million profit. At the same time in 2016, there was an $18 million loss. Chemours upped its guidance for the balance of this year, which has helped share prices more than double.
The building blocks of technology
Stocks in the technology sector have had a great year overall, and semiconductors have been no exception. The basic building blocks of today's technology have been in high demand after suffering a big slump in 2015 and 2016.
Universal Display, a designer and maker of organic light emitting diodes (OLED) for displays on devices, has been following the trend this year. After investing heavily in new OLED display technology, sales are starting to take off as the new tech is beginning to be adopted. Year-to-date, revenue and profits are up 68% and 137%, respectively. The stock has followed suit, up nearly 200% as of Nov. 8, as investors expect the momentum to continue.
Know what you're buying
Some caution is in order. While these stocks are touting great returns so far this year, that can quickly change as bigger conditions change.
That doesn't mean cyclical stocks are a bad bet, especially if the company builds a revolutionary product like Universal Display does. Just bear in mind that chasing a current trend could yield undesirable results; the very definition of cyclical implies the trend won't last forever. However, a quality cyclical company can still be a good investment for the long term, albeit an up-and-down journey. But don't forget the need to diversify your portfolio. For instance, you might consider pairing cyclical stocks with some consumer staple stocks, which are typically more defensive in nature as people buy their products now matter what the economy is doing.
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