Cyclical stocks are shares of companies whose performance is heavily dependent on business cycles and economic conditions. These stocks represent industries that produce non-essential, or discretionary, goods and services, such as automobiles, housing, entertainment, travel, and retail.
As the Federal Reserve lowers interest rates, it creates a favorable environment for investing in cyclical stocks. Lower interest rates reduce the cost of borrowing, which encourages both consumers and businesses to take out loans and spend more. This boost in consumer spending is particularly beneficial for companies that sell discretionary goods and services, such as those in the automotive, housing, travel, and retail sectors.
According to the latest report, released by the U.S. Bureau of Economic Analysis (BEA) on September 27, personal income in the US increased by $50.5 billion, or 0.2%, in August. This growth was driven by an increase in compensation, which was partially offset by a decrease in personal income receipts on assets. Disposable personal income (DPI), which is personal income less personal current taxes, also increased by $34.2 billion, or 0.2%. Additionally, personal consumption expenditures (PCE) rose by $47.2 billion, or 0.2%, with a $54.8 billion increase in spending for services and a $7.6 billion decrease in spending for goods.
Large Bank Sees Stabilizing Economy Boosting Cyclical Stocks
On October 14, CNBC reported that Morgan Stanley is optimistic about the stabilizing economy and its potential to boost cyclical stocks. According to equity strategist Michael Wilson, the recent rise in yields following optimistic economic data, including the latest wholesale inflation report, could indicate that the bond market is beginning to part with some of the growth concerns on the hope that the economy is on stable footing. He added that this trend provides greater confidence in cyclical stocks, which are positively correlated to upward moves in the 10-year Treasury yield. Wilson expects both rates and economic data to support cyclical stocks. The bank’s bullish call comes as the S&P 500 rose to a fresh record high, supported by better-than-expected results from a handful of companies that have reported third-quarter results.
Cyclical stocks offer significant opportunities for investors looking to capitalize on economic growth and favorable monetary policy. As the Federal Reserve continues to lower interest rates, the reduced borrowing costs will continue to stimulate consumer and business spending, driving demand for discretionary goods and services. With that in context let’s take a look at the 7 best consumer cyclical stocks to buy according to hedge funds.
Is PDD Holdings Inc. (PDD) The Best Consumer Cyclical Stocks To Buy According to Hedge Funds?
A close-up of a customer using the company's e-commerce platform whilst shopping online.
Our Methodology
To compile our list of the 7 best consumer cyclical stocks to buy according to hedge funds, we used the Finviz and Yahoo stock screeners to find the largest consumer cyclical companies. We then narrowed our choices to 7 stocks according to their hedge fund sentiment, which was taken from our database of 912 elite hedge funds as of Q2 of 2024. The list is sorted in ascending order of their hedge fund sentiment, as of the second quarter.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
PDD Holdings Inc. (NASDAQ:PDD), formerly known as Pinduoduo, is a Chinese e-commerce platform founded in 2015. The company is known for its unique “social commerce” model, which encourages group buying and social sharing to unlock discounts.
One of the most promising aspects of PDD Holdings Inc.’s (NASDAQ:PDD) business is its ownership of the online marketplace Temu, which is rapidly expanding in Europe and North America and has the potential to become one of the world’s most popular online shopping destinations. PDD Holdings Inc.’s (NASDAQ:PDD) growth is driven by its ability to aggregate large groups of buyers to negotiate lower prices from suppliers, passing the savings on to its users. This model has proven to be highly effective. As the company continues to expand its user base and cross-border business, it is well-positioned to maintain its growth momentum.
On August 26, PDD Holdings Inc. (NASDAQ:PDD) reported that its revenue surged by 86% year-over-year to $13.35 billion for the quarter ended on June 30. However, the revenue fell short of consensus estimates of $14.04 billion. This shortfall in revenues was due to an increase in operating expenses, which ballooned by 48% year-over-year to $4.23 billion. The rise in operating expenses was driven by increased investments in marketing, advertising, and promotions to attract shoppers.
PDD Holdings Inc.’s (NASDAQ:PDD) lower-than-expected revenues were due to high unemployment rates in China’s economy which has led consumers to reduce spending and negatively impacted the country’s retail and e-commerce companies. However, sales growth is expected to recover, due to significant stimulus in China which aims to boost economic growth and consumer spending. In their Q2, investment letter, Hayden Capital, an investment management firm, stated the followingregarding PDD Holdings Inc. (NASDAQ:PDD):
“A few weeks ago, Latepost (a leading Chinese technology news outlet) confirmed Pinduoduo’s online grocery initiative is solidly profitable (LINK). According to the article, Duoduo Grocery is able to achieve ~5% net profit margins in competitive markets (where they go up against Meituan Select). In non-competitive markets, they can achieve ~10 – 15% net margins. The company doesn’t disclose the exact scale of Duoduo Grocery, but our calculations indicate it’s likely around ~RMB 300BN this year, and still growing in the double-digits. At that level, the division is likely contributing ~US $2.5BN in annual profits17. It’s an impressive result, but admittedly, not a huge needle-mover in light of the total $17.6BN net profits the company is expected to make this year (~14% of overall profits).
From a valuation perspective, PDD Holdings Inc. (NASDAQ:PDD) is trading at attractive levels, with a forward price-to-earnings ratio of 10.45 as of October 21, representing a nearly 40.19% discount to its sector median of 17.48. Analysts expect a nearly 58.67% increase in PDD Holdings Inc.’s (NASDAQ:PDD) earnings this year. Industry analysts are bullish on the company’s stock price and have a consensus Buy rating at a target price of $167.85, which implies a 29.18% increase from its current level. PDD Holdings Inc. (NASDAQ:PDD) is a compelling investment opportunity for investors looking to capitalize on the growth of the e-commerce industry.
Overall, PDD ranks 4th on our list of the best consumer cyclical stocks to buy according to hedge funds. While we acknowledge the potential of PDD as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PDD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
