The Best Cyclical Stocks to Buy

Consumer cyclical stocks are typically popular with investors when the economy is growing, because that’s when consumers are more likely to spend. The sector includes industries like retail stores, automakers, and restaurant and entertainment companies, to name just a few. The sector is also home to two popular technology-related companies, Amazon.com AMZN and Tesla TSLA.

During the trailing one-year period, the Morningstar US Consumer Cyclical Index has returned 25.68%, while the Morningstar US Market Index has returned 27.80% as of March 4, 2024.

The consumer cyclical stocks that Morningstar covers look 2% undervalued as of March 4, 2024.

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 March 4, 2024.

1. VP VFC
2. Hanesbrands HBI
3. BorgWarner BWA
4. Adient PLC ADNT
5. JD.com JD
6. Etsy ETSY
7. Sabre SABR
8. Chewy CHWY
9. Yum China YUMC
10. Aptiv PLC APTV

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 March 4, 2024.

VP

• Morningstar Price/Fair Value: 0.30
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Industry: Apparel Manufacturing

VP 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 70% below our fair value estimate of $53.00.

VF has built a portfolio of solid brands in multiple apparel categories. We view the three brands that account for about 80% 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.

VF’s new 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. We forecast VF will lift its operating margins to nearly 15% in three years from recent levels below 10% 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 is still relatively small ($3.7 billion in fiscal 2023 revenue) compared with activewear peers wide-moat Nike and narrow-moat Adidas, which are about 14 and 6 times larger, respectively. VF’s success in improving Vans’ results will have a big impact on its valuation.

In contrast, The North Face has been posting strong sales growth due to 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 other labels, including Timberland, Dickies, and Supreme, have largely been disappointing. We believe the firm may sell some of its noncore 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: 0.31
• 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 69% undervalued; we think the stock is worth $17.30.

Narrow-moat Hanesbrands is the market leader in basic innerwear (about 60% of sales) 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 after 2023. In May 2021, the firm unveiled its Full Potential plan to expand global Champion, bring growth back to innerwear, improve connections to consumers (through greater marketing and enhanced e-commerce, for example), and streamline its portfolio.

Champion’s sales have been very disappointing of late. Media reports suggest that the brand is likely to be sold in the near term. If it is sold, Hanes plans to use the proceeds for debt reduction. If, instead, the firm decides to keep Champion, we believe the brand has expansion opportunities as it and other activewear apparel have become more than just athletic apparel and are increasingly worn as lifestyle/fashion brands.

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.

BorgWarner

• Morningstar Price/Fair Value: 0.43
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Industry: Auto Parts

BorgWarner is 57% undervalued relative to our $72.00 fair value estimate. This top cyclical stock from the auto-parts industry earns a narrow economic moat rating.

BorgWarner is well positioned to capitalize on industry trends arising from global clean air regulations, consumers’ demand for fuel economy, and the popularity of sport utility and crossover vehicles around the world. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. Acquisitions of vehicle electrification companies such as Remy, Delphi Technologies, Akasol, and Santroll as well as the completed spinoff of the fuel systems and aftermarket business lines as Phinia support our thesis.

In our opinion, BorgWarner is well positioned for the trends in the auto sector that will result in revenue growth in excess of the growth in global automobile demand. From a 2019 base pro forma for the Phinia spinoff in July and the Delphi acquisition in 2020, we estimate 6% average annual revenue growth over our five-year forecast, roughly 3-5 percentage points higher than our expectations for 1%-3% long-term growth in global light-vehicle demand. We expect turbocharged four-cylinder gasoline engine penetration to accelerate, given more-stringent clean air legislation around the world. Turbochargers, one of BorgWarner's products for which it commands an industry-leading market share and accounted for 20% of 2022 revenue, are a cost-effective way for original equipment manufacturers to improve engine efficiency.

BorgWarner is also well positioned for growth in hybrids and battery electric vehicles. Its product portfolio consists of e-motors, power electronics, control modules and software, chargers, and battery modules and systems. Regardless of the powertrain automakers chose, we think BorgWarner's revenue growth potential is unchanged.

BorgWarner's drivetrain business includes wet dual-clutch and torque transfer technologies. Dual-clutch transmissions, which contain eight or more gears, compared with older technology automatic transmissions equipped with four gears, can generate 5%-15% in fuel savings. Torque transfer devices enable all-wheel drive and four-wheel drive for globally popular SUVs and crossovers.

Adient PLC

• Morningstar Price/Fair Value: 0.47
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Industry: Auto Parts

Top cyclical stock Adient looks 53% undervalued compared with our $71.00 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 simply 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 electronics content in seats.

We think some investors may need to reframe their perspective on 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.

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 once the chip shortage ends 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.

JD.com

• Morningstar Price/Fair Value: 0.48
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Wide
• Industry: Internet Retail

JD.com earns a wide economic moat rating. The shares of this internet retail company look 52% undervalued relative to our $46.00 fair value estimate.

JD.com offers authentic products from its online first party (1P) business with speedy and high-quality delivery service. It adopts an asset-heavy 1P model with self-owned inventory and largely self-built logistics, complemented by an asset-light third-party (3P) model. By comparison, its competitor Alibaba relies mostly on a 3P model. Underperforming Pinduoduo and Douyin, JD’s GMV/online retail sales of goods has decreased from 30.7% in 2021 to 29.2% in 2022. To reinvigorate growth, JD wants to change customers’ mindshare of JD as an everyday low-price platform and has launched a CNY 10 billion subsidy program to attract price-sensitive customers. It is removing sales of nonstrategic low-margin products from the 1P business and allowing 3P merchants and business partners to provide these products instead. JD.com is also streamlining its organization to increase its ability to respond to quickly changing market dynamics. We expect JD.com to see weaker sales growth this year amid these changes.

In the medium term, we expect to see stable margin, after cutting much of its unprofitable businesses such as community group purchase, Jingxi, and international businesses in 2022. JD.com will continue to put more emphasis on high-quality profitability instead of low-quality growth. JD's logistics business JDL became an independent business unit that opens its services to third parties. JDL management will be squarely focused on profitability as well, and has achieved positive non-IFRS net profit in 2022. As the logistics business gains scale and reaches higher capacity utilization, we will see gross profit margin improvement.

JD is a long-term margin expansion story driven by increasing scale from its 1P and 3P businesses. Larger scale in each category will increase its bargaining power with suppliers. Since 2016, JD no longer fully reinvests its gains from improving scale and is committed to delivering annual margin expansion in the long run. The increase in mix from higher-margin third-party platform business and efficiency of scale will help lift margins.

Etsy

• Morningstar Price/Fair Value: 0.48
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Wide
• Industry: Internet Retail

Etsy is an undervalued consumer cyclical stock, trading 52% below our fair value estimate of $140.00. The company from the internet retail industry earns a wide economic moat rating.

Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of heterogeneous verticals in the long tail of unbranded products. The firm’s marketplace properties—Etsy, Reverb, and Depop—all target noncommoditized inventories, generate commissions on third-party, peer to peer sales, and strive to create a “treasure hunt” experience around a unique, customizable, and consequently less price elastic product suite. The firm’s core “Etsy” marketplace accounts for roughly 90% of consolidated gross merchandise volume, or GMV.

We view Etsy’s competitive strategy as sound, with the firm's playbook designed to improve buyer consideration and frequency through brand marketing, improvements in search efficacy, platform trust, and reliability. The craft marketplace operator has retained a sizable chunk of the customer cohorts it acquired during a pandemic-induced volumetric surge, seeing its active user base grow 101% between 2019 and 2023, which, in tandem with a consequential increase in average spending per buyer—up 22% over that period—has resulted in a marketplace that's 2.4 times larger than its prepandemic iteration. As the firm works to improve its value perception, unprompted awareness, and as it rolls out a suite of operational improvements like gift mode and a planned loyalty program, we see a viable route to mid-single-digit growth in average annual per buyer spending over the decade to come.

In the future, we expect Etsy to onboard unique inventory, to expand its burgeoning international operations (45%-50% of GMV), and to expand its suite of seller tools and advertising options, while periodically targeting competitively advantaged tuck-in acquisitions that offer exposure to similarly differentiated end markets. Particularly important will be efforts to increase repeat purchase behavior, with the long-term driver of GMV growth likely to be increased average revenue per user in lieu of buyer acquisition after the firm achieves saturation in its six key markets—getting buyers to go to Etsy “not just for the cushions, but for the couch.” On balance, we take a positive view of the firm's business strategy.

Sabre

• Morningstar Price/Fair Value: 0.48
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Industry: Travel Services

Sabre earns a narrow economic moat rating. The shares of this travel services company look 52% undervalued relative to our $5.00 fair value estimate.

Despite near-term economic and credit market and long-term corporate travel demand uncertainty, we expect Sabre to maintain its position in global distribution systems over the next 10 years, driven by a leading network of airline content and travel agency customers as well as its solid position in technology solutions for these carriers and agents. Sabre’s 30%-plus GDS air transaction share is the second largest of the three companies (behind narrow-moat Amadeus and ahead of privately held Travelport) that together control about 100% of market volume. Sabre is also a leader in providing technology solutions to travel suppliers.

Sabre's GDS enjoys a network advantage, which is the source of its narrow moat rating. As more supplier content (predominantly airline content) is added, more travel agents use the platform, and as more travel agents use the platform, suppliers offer more content. This network advantage is solidified by technology that integrates GDS content with back-office operations of agents and IT solutions of suppliers, leading to more accurate information that is also easier to book. The company's platform reach should grow as Sabre continues to revitalize its technology and looks to expand with low-cost carriers and in countries where it previously had only minimal penetration, which are also markets with higher yields than the consolidated North American region.

Replicating Sabre's GDS platform would entail aggregating and connecting content from several hundred airlines to a platform that is also connected to travel agents, which requires significant costs and time. Although we see GDS aggregation, processing, and back-office advantages as substantial, technology architectures like those of Etraveli enable end users to access not only GDS content but supply from competing platforms, which could take some volume from companies like Sabre. Also, GDS faces some risk of larger carriers making direct connections with larger agencies, although we expect these relationships to be the exception rather than the rule and for Sabre to still be the aggregating platform in either case.

Chewy

• Morningstar Price/Fair Value: 0.49
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Industry: Internet Retail

This narrow-moat cyclical company operates in the internet retail industry. Chewy stock trades 51% below our fair value estimate of $36.00.

The pet care industry is quite attractive, with brand loyalty, sticky purchase habits, pet humanization, and minimal cyclicality representing just a handful of alluring structural features in an $144 billion US market (estimated). While a slew of players jockey for manufacturing and retail market share, Chewy’s service-intensive subscription-driven platform looks poised to capture a disproportionate share of online sales, with the firm building a strong brand around customer service and perceived quality.

Chewy was founded to compete with wide-moat Amazon.com for online preeminence in a category that was rife with inefficiencies and saw only low-single-digit online penetration at the time. By emphasizing the labor-intensive aspects of the business model that its largest competitor intentionally eschewed, Chewy has amassed a loyal customer base, with robust subscription penetration and strengthening monetization over time, generating net revenue retention of over 100% for each annual cohort. The firm’s roughly 75% autoship penetration, a subscription-based model that pet consumables and medication lend themselves to nicely, defrays fulfillment cost pressures relative to large peers, given that a high degree of order predictability renders inventory management markedly easier, reducing split shipments.

With a digital native platform and expansion into adjacent sales layers in pet healthcare, including prescription medications and insurance, Chewy has been well positioned to benefit from explosive e-commerce growth in the category—en route to high-40% US online market share in 2022, by our estimates. With the expansion of higher-margin private label product, pet healthcare, and increasingly valuable maturing cohorts, Chewy looks poised to continue its leadership well into the future, in a category with 30% online penetration in the US and no apparent glass ceiling for e-commerce saturation.

Finally, Chewy's international expansion remains a key part of its long-term plan, with a planned Canadian market launch in 2023 looking to us like a natural extension of the brand and setting the stage for a larger international thrust.

Yum China

• Morningstar Price/Fair Value: 0.52
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Industry: Restaurants

Trading 48% 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 $80.00.

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-19 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 billion-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.

Aptiv PLC

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

Narrow-moat Aptiv rounds out our list of the best cyclical stocks to buy. We think the stock of this auto-parts company is 47% undervalued and worth $148.00.

We expect Aptiv’s average yearly revenue growth to exceed average annual growth in global light-vehicle demand by high-single-digit to low-double-digit percentage points. The company provides automakers with components and systems that are in high demand from consumers and that government regulation requires to be installed. Aptiv’s high-growth technologies include advanced driver-assist systems, autonomous driving, connectivity, data services, and high-voltage electrical distribution systems for hybrids and battery electric vehicles.

In our opinion, Aptiv’s ability to regularly innovate and commercialize new technologies bolsters sales growth, margin, and return on investment. A global manufacturing presence enables Aptiv to serve customers around the world, capitalizing on the economies of scale inherent in automakers' plans to use more common vehicle platforms. Lean manufacturing discipline and a low-cost country footprint enable more favorable operating leverage as volume increases.

Aptiv enjoys relatively sticky market share, supported by highly integrated customer relationships and long-term contracts. The design phase of a vehicle program can last between 18 months and three years depending on the complexity and extent of the model redesign. The production phase averages between five and 10 years. Engineering and design for the types of products that Aptiv provides necessitate highly integrated, long-term customer relationships that are not easily broken by competitors' attempts at market penetration.

New Car Assessment Programs, or NCAPs, are used by governments around the world to provide an independent vehicle safety rating. Legislators, especially in the United States and in Europe, have set NCAP guidelines that will progressively require the addition of ADAS features as standard equipment through the end of this decade. If automakers intend to achieve a 4- or 5-star safety rating for their vehicles, some ADAS features must be part of that vehicle's standard equipment to even qualify for certain rating levels.

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 and auto strategist David Whiston, travel senior analyst Dan Wasiolek, and apparel senior analyst David Swartz, and restaurant analyst Sean Dunlop.