Investors are always advised to have a diversified portfolio: stocks, bonds, cash, value stocks, and growth stocks. It’s also a great idea to have a good mix of cyclical and non-cyclical stocks.
When the economy is expected to perform poorly, or already is, investors tend to shy away from cyclical stocks and flock to non-cyclical or defensive stocks. Defensive stocks, like those found in the consumer staples, healthcare, and utility sectors, can give your retirement portfolio a much-needed income cushion.
Regardless of what the economy is doing, people will still pay to have clean hair, access warm water, get rid of headaches, drink, smoke, and have fresh breath.
That’s why investors like to make room for defensive plays like Johnson & Johnson (NYSE/JNJ), Altria Group, Inc. (NYSE/MO), Consolidated Edison, Inc. (NYSE/ED), and Merck & Co., Inc. (NYSE/MRK).
Not surprisingly, defensive stocks have been the best-performing sector on the S&P 500 this year. Defensive stocks are, on average, up 18% in 2013, easily outpacing technology, industrial, energy, discretionary, and financial stocks.
This should be a little surprising when you consider that the talking heads on Wall Street remind us daily that the U.S. economy is doing really, really well! The Dow Jones Industrial Average and S&P 500 may be in record territory, but that doesn’t mean individual investors have a lot of faith in what they see.
What it could signal is that investors do not have faith in the economy and fixed-income equities, and instead are looking to park their money in financially solid companies that pay out regular dividends.
That is a convincing argument.
At the same time, if the U.S. economy does indeed begin to legitimately improve later this year, so too will consumer confidence. Cyclical stocks will become more fashionable and follow suit, as they are wont to do.
After all, when the economy is strong and people are feeling more optimistic, they are more willing to fork out money on non-essentials, like travel, cars, higher-end fashion, and even dining out more frequently.
Here are a few cyclical stocks that have been performing well, and could do even better when the U.S. economy actually does rebound.
The luxury sector continues to show solid growth, and Coach, Inc. (NYSE/COH) could be the one to catch. The company’s third-quarter results beat analysts’ expectations; earnings increased year-over-year from $1.1 billion to $1.2 billion, while net income was up 6.2% at $239 million, or $0.84 per share.
America’s fifth most popular burger chain, Burger King Worldwide, Inc. (NYSE/BKW), has been bullish since September 2012. The company recently said it is shaking up its management team, and provided positive guidance.
Then there is Indigo Books & Music Inc. (TSX/IDG). This Canadian specialty retail company has been performing well in spite of a weak cyclical market. The company has a market cap of $288 million, a strong cash position, virtually no long-term debt, and is up almost 30% year-over-year.
Defensive stocks may still be the darlings of Wall Street, but a slowly improving U.S. economy means cyclical stocks could gain further momentum. The fact that investors are ignoring cyclical stocks right now makes them that much more intriguing.