In recent weeks, we’ve seen a massive shift in the stock market. Investors have dumped technology stocks and piled money into cyclical stocks such as banks, airlines, and energy companies. It seems the ‘great reopening trade’ is back on.
I don’t plan to invest a lot of money in cyclical stocks. That’s because history shows that, often, they’re quite poor investments in the long run. Having said that, there are a few cyclical stocks I’d buy for my portfolio today. Here are two UK stocks I like the look of right now.
A top UK stock I’d buy now
One cyclical stock that looks attractive to me at present is Prudential (LSE: PRU). The financial services company specialises in insurance and savings solutions. After recently spinning off its US operations, it’s now purely focused on Asia and Africa.
There are two main reasons I’m bullish on Prudential. The first is that the company’s well-placed to benefit from higher interest rates in the future. Life insurers typically profit from the difference between the money they pay out on policies and the money they earn on investments (stocks and bonds etc). When interest rates are higher, insurers can earn more from their fixed-income investments. This can boost profits.
The second reason I’m bullish here is that the focus on Asia and Africa means there’s significant long-term growth potential. In these areas of the world, incomes are rising rapidly and this is creating strong demand for financial solutions. This can be seen in the group’s first-half results. For the six months to 30 June, annual premium equivalent (APE) sales in Asia and Africa were up 17% to $2,083m.
There are risks to consider here, of course. One is the Chinese economy. If the China Evergrande crisis results in an economic slowdown, Prudential could be impacted.
Overall however, I think the long-term risk/reward proposition here’s attractive. The stock’s forward-looking P/E ratio of 15.5 seems very reasonable to me.
36% upside?
Another cyclical stock I’d buy today is DS Smith (LSE: SMDS). It’s a leading packaging company that specialises in sustainable solutions for the e-commerce and fast-moving consumer goods industries.
There are a number of reasons I like the look of DS Smith shares right now. The first is that the company stands to benefit from an economic recovery. Generally speaking, higher levels of economic activity lead to higher demand for packaging.
The second is the company’s focus on e-commerce packaging. The e-commerce industry is projected to grow substantially in the years ahead. So this should provide tailwinds.
DS Smith recently posted an encouraging trading statement. The group said that since May, trading has continued to progress well and that box volumes have grown “very strongly” versus both the comparable prior year period and the comparable period in 2019.
Looking ahead, management was confident about the future. “While the macroeconomic environment remains uncertain, we remain confident about the prospects for the business in this financial year and beyond,” said CEO Miles Roberts.
One big risk here’s inflation. In the near-term, rising input and transportation costs could impact profitability. Overall, however, I’m quite bullish on DS Smith. I see the stock’s forward-looking P/E ratio of 14.1 as attractive.
It’s worth noting that analysts at JP Morgan recently raised their price target to 577p – about 36% above the current share price.
