Despite the recent volatility in the stock markets, investors should not shun cyclical stocks. In a market recovery, cyclical shares tend to do better than defensive shares. I’ve picked out four cyclical shares that should benefit from positive near-term fundamentals.
Barclays
Barclays (LSE: BARC) is well on its way to recovery. The bank is selling its underperforming non-core assets and focusing on its more profitable operations in retail banking in the UK and Africa and its Barclaycard business. These more profitable operations already generate an average return on equity (ROE) of more than 15%, and it would not be long before the bank would meet its group ROE target of more than 12%.
The bank is also relatively cheap compared to its peers. Barclay’s price to tangible book value is 0.90. Its forward P/E is 11.1, based on analysts’ estimates that underlying EPS will grow 34% to 23.2 pence this year. In 2016, analysts expect underlying EPS will grow by another 22%, to 28.2 pence. And, on those earnings, its forward P/E will fall to just 9.0.
Travis Perkins
A robust housing market in the UK should mean Travis Perkins (LSE: TPK) would do well in the foreseeable future. An increase in housebuilding activity is not the only way this helps the company. Historic under-investment in the existing housing stock should also mean there will also be growth in home improvement, repair and maintenance activity.
Its latest half-year earnings release was positive, as the company reported a 3.2% increase in net profits of 3.1% to £134 million, whilst revenues increased 7.8% to £2.94 billion. An increase in the interim dividend to 14.75 pence a share, a rise of more than 20%, reflects management’s confidence in its earnings outlook in the medium term.
However, analysts were disappointed that Travis Perkins did not raise its full-year earnings guidance and Citigroup downgraded the stock from a “buy” to “hold” on a valuation call. Nevertheless, the positive outlook on the housing market and the relatively strong UK economy should mean Travis Perkins is set to outperform the rest of the market.
Thomas Cook Group
As household disposable incomes rise, the associated increase in tourism spending should benefit Thomas Cook Group (LSE: TCG). Recent political instability in the Middle East and North Africa, the July terror attack in Tunisia and the way it handled the deaths of two children in Corfu has badly affected the company’s share price. But these factors should only affect the company in the short term.
Shares in Thomas Cook trade at a significant discount to rival TUI, as Thomas Cook trades at 8.9 times its expected 2016 earnings, whilst TUI is valued at 15.0 times its expected 2016 earnings.
Schroders
Despite growing uncertainties in the financial markets, Schroders (LSE: SDR) is seeing strong net inflows into the company’s asset management business. Its latest interim results showed assets under management rising 14% to £309.9 billion.
Unlike Aberdeen Asset Management and Ashmore Group, which focus on emerging market assets, Schroders focus on markets in developed economies. As funds flow out of emerging markets into developed markets, Schroders is seeing strong net inflows, while funds are flowing out of the two emerging market focused asset managers. As the direction of movement in funds is unlikely to reverse course, Schroders should continue to outperform its emerging market focused rivals.
