The Best Cyclical Stocks to Buy

There’s more to the consumer cyclical sector than its two most famous companies, Amazon.com AMZN and Tesla TSLA.

The consumer cyclical stocks that Morningstar covers look 3.5% undervalued. During the trailing one-year period, the Morningstar US Consumer Cyclical Index returned 11.93%, while the Morningstar US Market Index returned 25.07% as of June 17, 2024.

What Are Cyclical Stocks?

Consumer cyclical stocks are typically popular with investors when the economy is growing because that’s when consumers are more likely to spend money on discretionary items. Conversely, investors are usually less interested in these companies during economic slowdowns and recessions when consumers spend less. The sector includes industries like retail stores, automakers, and restaurant and entertainment companies, to name just a few. Two are popular technology-related companies, Amazon and Tesla.

To come up with our list of the best cyclical stocks to buy now, we screened for:

• Consumer cyclical stocks that earn narrow or wide Morningstar Economic Moat Ratings. We think companies with narrow economic moat ratings can fight off competitors for at least 10 years; wide-moat companies should remain competitive for 20 years or more.
• Consumer cyclical stocks that are undervalued relative to the average stock in the sector, as measured by our price/fair value metric.

10 Best Cyclical Stocks to Buy Now

The stocks of these consumer cyclical companies with economic moats are the most undervalued according to our metrics as of June 17, 2024.

1. VF VFC
2. Hanesbrands HBI
3. Adient ADNT
4. Yum China YUMC
5. The Swatch Group SWGAY
6. Carnival PLC CUK
7. Bayerische Motoren Werke BMWYY
8. Mercedes-Benz Group MBGAF
9. O-I Glass OI
10. Polaris PII

Here’s a little more about each of the best consumer cyclical stocks to buy, including commentary from the Morningstar analyst who covers the company. All data is as of June 17, 2024.

VF

• Morningstar Price/Fair Value: 0.29
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Industry: Apparel Manufacturing

VF is the cheapest stock on our list of the best consumer cyclical stocks to buy. The stock of this narrow-moat company from the apparel manufacturing industry is trading 71% below our fair value estimate of $48 per share.

VF has built a portfolio of solid brands in multiple apparel categories. We view the three brands that account for about three fourths of its sales (Vans, Timberland, and The North Face) as supporting its narrow moat based on a brand intangible asset. VF has struggled greatly over the past few quarters, but we believe it will grow faster than most competitors in the long run and maintain its competitive edge.

CEO Bracken Darrell has unveiled a turnaround plan called Reinvent. The main goals of the plan are to cut costs to produce about $300 million in annual savings, reduce debt aggressively, operate more efficiently in the Americas, and improve Vans' sales and profitability through product innovation and supply chain optimization. VF reported a woeful 4.5% adjusted operating margin in fiscal 2024, but we forecast its operating margins will gradually rise to about 13% in fiscal 2028 as it implements the Reinvent reforms. The firm posted an adjusted operating margin of 13% in fiscal 2022 before its results rapidly deteriorated.

Vans has grown from its roots in action sports into an everyday athleisure brand but has lost momentum. We think VF’s plans will work in the medium term and believe Vans has strong potential as it only has just above 1% market share in a global sportswear market that was estimated at $396 billion at retail in 2023 (Euromonitor). VF’s success in improving Vans’ results will have a big impact on its valuation.

Meanwhile, The North Face has been a consistent performer because of product innovations, brand extensions, and expansions of its direct-to-consumer business. We believe it has grown beyond its outdoor roots and become a leading brand for winter coats and other categories.

VF’s smaller other labels, including Timberland, Dickies, and Supreme, have struggled. VF is expected to sell some of its brands to raise cash for debt reduction and to focus on Vans and The North Face, which account for much of its equity value.

Hanesbrands

• Morningstar Price/Fair Value: 0.32
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Industry: Apparel Manufacturing

Narrow-moat Hanesbrands operates in the apparel manufacturing industry. This cheap cyclical stock is 68% undervalued; we think the stock is worth $15.80 per share.

Narrow-moat Hanesbrands is the market leader in basic innerwear in multiple countries. We believe its key innerwear brands like Hanes and Bonds (in Australia) achieve premium pricing. While the firm faces challenges from inflation, slowing demand for apparel, higher interest rates, and a highly competitive athleisure market, we think Hanes’ share leadership in replenishment apparel categories puts it in position for improving results in the coming years. In May 2021, the firm unveiled its Full Potential plan to bring growth back to innerwear, improve connections to consumers (through greater marketing and enhanced e-commerce, for example), and streamline its portfolio.

In June 2024, Hanes agreed to sell Champion to Authentic Brands Group. As Champion’s sales have been disappointing, Hanes’ management made the prudent decision to sell the brand to focus on its core basics. The proceeds, which could exceed $1 billion after taxes and other costs, should allow for faster debt reduction.

One of Hanes’ major initiatives is to improve the efficiency of its supply chain. It has already made progress in this area, having achieved a 15% increase in manufacturing output over the past five years. The company, unlike many rivals, primarily operates its own manufacturing facilities. More than 70% of the more than 2 billion apparel units sold by the firm each year are manufactured in its own plants or those of dedicated contractors. We believe the combination of strong pricing, new merchandise, and production efficiencies should allow Hanes to return to operating margins above 20% for its American innerwear business by 2026.

Adient

• Morningstar Price/Fair Value: 0.38
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Industry: Auto Parts

Adient looks 62% undervalued compared with our $68 fair value estimate. This auto-parts company earns a narrow economic moat rating.

Adient is the automotive seating business of Johnson Controls that was spun off to JCI shareholders in a taxable transaction Oct. 31, 2016. Adient leads the seating market with about 33% share globally. It is common for a spinoff to be ignored or misunderstood, but we think ignoring Adient just because it is an auto-parts supplier is shortsighted. Seating is one of the stickiest parts of the supplier sector since it is very difficult to take out an incumbent on a vehicle program, and automakers need suppliers that can consistently deliver high-quality seats in a just-in-time system all over the world. Automakers have global platforms and are willing to pay for the right supplier rather than the supplier with the lowest price. We think the seating sector can benefit from autonomous and electric vehicles rather than be hurt by the change because AVs and EVs open up new seating configurations and possibly more electronic content in seats.

We think some investors may need to reframe their perspective on the seating and auto suppliers space by understanding that seating is not a commodity product and that firms such as Adient have a narrow economic moat with maintainable competitive advantages from three moat sources: intangible assets, switching costs, and cost advantage. It is normal in the seating space, for example, that an incumbent supplier gets the next generation of a vehicle program nearly 100% of the time, so business is very sticky.

At the end of fiscal 2021, Adient consolidated some of its Chinese seating joint ventures so it can pursue business with more Japanese, German, and startup electric vehicle firms in China. We think the company can increase operating margin including equity income over the next several years by restructuring its operations to be a better manufacturer, and the joint venture sales brought good cash flow to reduce debt. Management also formed a joint venture with Boeing in January 2018 focused on business-class seats, of which Adient owns 19.9%. For patient investors who can wait for the company to restructure its manufacturing, we see Adient as an interesting turnaround story with improving free-cash-flow generation ability.

Yum China

• Morningstar Price/Fair Value: 0.44
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Industry: Restaurants

Trading 56% below our fair value estimate, Yum China is a top undervalued consumer cyclical stock. We think shares of this wide-moat stock in the restaurant industry are worth $76 per share.

The covid-19 pandemic provided Yum China the opportunity to accelerate store openings at more favorable lease terms. The company added more than 3,700 locations from 2020 to 2022, equivalent to a 36% increase from 2019. Now that China’s “zero-covid” policy is in the rearview mirror, we expect these new restaurants to not only deliver significant incremental revenue but also be accretive to the overall margins. Over the next several years, we expect Yum China to speed up new unit openings. We share management’s view that there remain plenty of expansion opportunities in lower-tier cities—evidenced by nearly 1,200 Chinese cities still with no KFC presence.

Over the longer term, we believe there are several opportunities for Yum China to gain a share in the fragmented, USD 700 billion Chinese restaurant market. In China, chains account for roughly 18% of restaurant spending compared with 61% in the US and 34% across the globe. Our conviction in rising fast food penetration is underpinned by three long-term secular trends: longer working hours for urban consumers; rapidly rising disposable income; and ever-smaller family sizes. Coupled with strong brand recognition and an unrivaled supply chain, Yum China is set to be the prime beneficiary of growing Chinese fast-food spending. We're also optimistic about Yum China's various top-line drivers, including value platforms, menu innovations, new restaurant formats, enhanced digital marketing efforts (underscored by 300 million loyalty program members), unrivaled delivery capabilities, and nascent brand expansion potential in Lavazza, Taco Bell, and Huang Ji Huang.

At its 2021 investor day, Yum China management committed a five-year budget of USD 1.0 billion to USD 1.5 billion to technology and digital development. We believe the company is beginning to reap the fruits of its investments. We believe a significant amount of cost savings will be passed through to the bottom line simply because these investments at scale are not likely to be replicated by competitors. This underpins our forecast for operating margin expansion over the long term.

The Swatch Group

• Morningstar Price/Fair Value: 0.49
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Narrow
• Industry: Luxury Goods

The Swatch Group is 51% undervalued relative to our $21.30 fair value estimate. This cyclical stock from the luxury goods industry earns a narrow economic moat rating.

The Swatch Group is the biggest vertically integrated Swiss watch manufacturer with 18 brands covering all price ranges, from entry to ultraluxury. Swatch-owned brands account for around 35% of Swiss watch exports, and the company supplies competitors with watch movements. Swatch Group’s luxury brands boast 100- to 200-year histories, iconic collections, and deep cultural heritage. Most of Swatch’s brands (at price points below $10,000) benefit from a cost advantage through scale and a higher degree of production automation. Swatch’s diversification in terms of brands and price points helps it to avoid the pitfalls that come with extending brands into categories where they don’t strategically belong and to potentially capture a positive mix as consumers trade up. However, we see a lack of control over distribution (a little less than 60% of sales are wholesale) as a weak spot for the company. Distributors are more likely to engage in discounting to maintain cash flows when demand sours, which we believe can be damaging for brands with long-shelf-life products. We believe that the demand for high-end watches is not structurally impaired (around 50% of revenue), branded jewelry offers an attractive upside for growth (around 9% of revenue from the Harry Winston brand), while lower-priced watches (less than 20% of sales) are stabilizing and growing from a low base as the smartwatch category matures and innovation provides a boost. The company is increasingly taking action to tackle costs in the low-end brands and limit grey market channels for high-end brands while investments in automation should help achieve higher profitability even with lower volumes. We expect Swatch Group’s sales to grow at a 4% pace over the long term (versus low-single-digit growth over the prior decade) with mid-single-digit growth for its higher-priced watch brands such as Omega, Longines, Breguet, and Blancpain, high-single-digit growth for jewelry brand Harry Winston and low-single-digit growth for low-end watches (Tissot, Swatch, Mido, Hamilton, and so on).

Carnival

• Morningstar Price/Fair Value: 0.50
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Industry: Leisure

Carnival PLC earns a narrow economic moat rating. The shares of this leisure company look 50% undervalued relative to our $28 fair value estimate.

Carnival remains the largest company in the cruise industry, with nine global brands and 92 ships at the end of fiscal 2023. The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity. Additionally, the repositioning and deployment of ships to faster-growing and underrepresented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean before the pandemic, a factor that the firm can again utilize to help optimize forward pricing. With a European demand profile that has recently returned to normalized levels, we believe there is ample support for improving economic performance at Carnival.

Since consumers resumed cruising in the summer of 2021 (after a year-plus no-sail halt), cruise operators have been able to reassure passengers of both the safety and value propositions of cruising, all while offering a holiday product at 25% to 50% less than land-based alternatives. We expect this discount to shrink over time, bolstering pricing growth as Carnival lifts pricing toward parity aided by the firm’s brand intangible asset. This, along with full occupancy and little near-term price pressure, sets Carnival up for healthy medium-term yield gains. On the expense side, with ongoing cost optimization initiatives and rationalized spending on pandemic protocols, spending should be well managed, resurrecting a cost edge. However, higher-than-normal dry dock days along with foreign-exchange headwinds could crimp profitability intermittently.

These above factors should lead to average returns on invested capital including goodwill that will again surpass our 10% weighted average cost of capital estimate. While we don’t expect this to occur until 2027, we project earnings before interest to surpass prepandemic levels by 2026. Although we believe Carnival has carved out a broad offering across demographics, the product still has to compete with other land-based vacations and discretionary spending, bounding our moat rating to narrow.

Bayerische Motoren Werke

• Morningstar Price/Fair Value: 0.53
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Industry: Auto Manufacturers

BMW is an undervalued consumer cyclical stock, trading 47% below our fair value estimate of $59 per share. The company from the auto manufacturers industry earns a narrow economic moat rating.

Because of the strength of its intangible assets, including brand and intellectual property, BMW has a narrow economic moat rating. Brand strength has enabled premium pricing across all of BMW’s products, while intellectual property supports the brand image with strong product execution, especially in powertrains.

BMW continues to outperform the overall car market despite uncertainties from the microchip shortage and is one of only a handful of automakers to which we assign an economic moat. As emerging-markets consumers become wealthier, many will purchase luxury items for the first time. Given the aspirational nature inherent in the company’s brands, including BMW cars and motorcycles, Mini, and Rolls-Royce, as well as the growth potential from increasing wealth in developing markets, we believe the company will continue to reward investors with solid returns.

BMW has consistently produced vehicles that command premium pricing and generated revenue increases above global vehicle growth rates. BMW also has a long-term goal to generate the automotive segment’s EBIT margin of 8% to 10%. The company has achieved a 15-year historical median industrial (includes Motorad) EBIT margin of 8.9%, demonstrating its ability to meet its margin objectives. Since 2002, on average, the company has outearned its cost of capital annually by over 800 basis points, a solid performance for an automaker.

BMW was included in an EU antitrust case covering diesel equipment collusion. The case was not related to “dieselgate” and covered German automakers’ practices in AdBlue urea injection to lower diesel emissions. The company took a EUR 1.4 billion provision in 2019 for a potential fine. In the second quarter of 2021, the firm reversed the provision by EUR 1.0 billion as it was fined EUR 373 million by the EU. However, we maintain a EUR 2.8 billion carve-out from our fair value estimate for potential ESG risk related to emissions.

Mercedes-Benz Group

• Morningstar Price/Fair Value: 0.54
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Industry: Auto Manufacturers

Mercedes-Benz earns a narrow economic moat rating. The shares of this auto company look 46% undervalued relative to our $127 fair value estimate.

The highly regarded Mercedes-Benz brand is one of the top premium and luxury automobile names in the world. The firm is also a European leader in commercial vans. Even so, Mercedes faces stiff competition in all of its markets. The company operates in the cyclical, capital-intense, highly competitive passenger vehicle industry where changes in unit volume can create large swings in operating leverage, raw material commodity costs can be volatile, and unionized labor can be expensive.

Geographically diverse sales reduce exposure to the economic conditions of any one region. Even so, premium brands like Mercedes-Benz limit exposure to downturns suffered by mass-market auto companies because wealthier customers' spending is less sensitive to recessions. Global population growth of high-net-worth individuals has averaged 5%, increasing Mercedes' addressable market faster than the 1%-3% rate we estimate for long-term global light-vehicle demand growth.

New products are critical to spurring consumer interest and can help results even in an economic downturn. Mercedes-Benz launches new or significantly refreshed models in various markets around the world every year. Research and development spending, including capitalized development costs, is substantial, averaging roughly 6% of sales, which we view as a necessary part of a long-term strategy. Environmental legislation worldwide forces automakers to design vehicles with more efficient combustion engines and electrified powertrains. By 2030, the company says it will be ready to go all-electric.

Daimler completed the spinoff of its truck and bus operations in December 2021 and changed its name to Mercedes-Benz Group in February 2022. In 2021, the truck and bus business, now called Daimler Truck, accounted for 20% of consolidated revenue, including discontinued operations and 11% of group-adjusted EBIT. The remaining operations of Mercedes-Benz Group include premium and luxury passenger vehicles and light commercial vans as well as Mercedes-Benz Mobility, which includes financial services and other mobility services like ride-hailing.

O-I Glass

• Morningstar Price/Fair Value: 0.54
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Industry: Packaging and Containers

This narrow-moat cyclical company operates in the packaging and containers industry. O-I Glass stock trades 56% below our fair value estimate of $22 per share.

O-I Glass is one of the world’s largest glass container manufacturers, with furnaces in North America, South America, and Europe. It turns molten glass into containers for beer, wine, spirits, and food, using standard and custom molds for a wide variety of customers. O-I operates roughly 70 glass plants and serves customers across the world, with the US as its largest region at about 30% of sales. In the past few years, O-I has gone through a portfolio-optimization plan to increase its focus on its glass container business and prioritized regions. As part of this plan, O-I divested its tabletop glass business as well as its Australia and New Zealand operations and is using the proceeds to fund capacity expansion and modernization projects.

O-I has a dominant position in the glass container market, often controlling the majority of market share in the regions in which it operates. Alcoholic beverages (beer, wine, and spirits) account for two thirds of the company's portfolio, with beer making up roughly half of the volume and the remainder split between wine and spirits. O-I sells its glass containers to both mainstream and craft brewers and has benefited from a shift toward craft beer that favors bottles. Nonalcoholic beverages account for roughly 15% of sales, with the remainder of O-I’s portfolio consisting of glass containers for food, which include jams, salsas, salad dressings, and more.

For the past 30 years, O-I Glass has had material exposure to an asbestos liability associated with its legacy operations that sold products that contained asbestos until 1958. O-I has paid out billions of dollars in settlement claims related to its legacy operations over the past three decades but moved to resolve this in 2019 with the construction of a wholly owned subsidiary, Paddock Enterprises. Paddock filed for bankruptcy protection, and O-I set up an asbestos trust to handle all current and future settlements. A settlement was achieved in 2022 in which the trust would be fully funded with $610 million from O-I, and the company was awarded an injunction that protects it from any future liabilities related to its legacy operation.

Polaris

• Morningstar Price/Fair Value: 0.54
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Industry: Recreational Vehicles

Wide-moat Polaris rounds out our list of the best cyclical stocks to buy. We think the stock of this recreational vehicles company is 46% undervalued and worth $145 per share.

Polaris is one of the longest-operating brands in powersports. We believe that its brands, innovative products, and lean manufacturing yield the firm a wide economic moat and that it stands to capitalize on its research and development, solid quality, operational excellence, and acquisition strategy. However, Polaris’ brands do not benefit from switching costs, and with peers innovating more quickly than in the past, it could jeopardize the firm’s ability to take price and share consistently, particularly in periods of inflated recalls or aggressive industry discounting.

Polaris had sacrificed some financial flexibility after its acquisitions of TAP (2016, now divested) and Boat Holdings (2018), but debt-service metrics have been rapidly worked down via EBITDA expansion and cost-saving scale benefits (with debt/adjusted EBITDA set to average around 1.3 times over our 10-year forecast). This unlocks Polaris’ ability to continue to strategically bolt on businesses (with opportunities likely in key inputs and parts and accessories arenas), which could help stimulate incremental profitability. For now, we anticipate a 7% top-line decline in 2024, as dealers cautiously take inventory, ensuring Polaris is shipping in trend with retail sales. International (low-double-digit percentage of sales) expansion over the long term also remains promising and could drive demand upside, particularly as Polaris capitalizes on its global operating footprint to gain a wider physical presence abroad.

As evidenced by solid ROICs (at 19%, including goodwill, in 2023), Polaris still has topnotch brand goodwill in its segments, supporting consumer interest and indicating the firm’s brand intangible asset is intact. And with supply chain constraints largely in the rearview mirror, we expect further improvement in market share, as innovative products drive incremental demand at retail. We think the ongoing restoration of modest prior market-share losses ahead will signal that the firm’s competitive edge is intact.

How to Find More of the Best Cyclical Stocks to Buy

Investors who’d like to extend their search for top consumer cyclical stocks can do the following:

• Review Morningstar’s comprehensive list of consumer cyclical stocks to investigate further.
• Use the Morningstar Investor screener to build a shortlist of consumer cyclical stocks to research and watch.
• Read the latest news about notable consumer cyclical stocks from Morningstar director Erin Lash, auto strategist David Whiston, travel senior analyst Dan Wasiolek, apparel senior analyst David Swartz, and restaurant senior analyst Sean Dunlop.