Looking for cyclicals with a little resilience

Without a heavy debt load, a company may be better equipped to handle a recession. These seven cyclical names all come with lower long-term debt to equity ratios.

  • By Nicholas Jasinski,
  • Barron's
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The coronavirus crisis and ensuing economic shutdowns have exposed companies that have taken on too much debt. That’s especially true for companies in cyclical, old-economy industries that might have seen a sizable portion of their business wiped out for 2020.

Energy, financials, and industrials are the worst performing sectors since the start of the year, down between 16% and 35%. Meanwhile, the technology, health care, and communication services sectors are up for the year. Investors have taken refuge in companies that can continue online business as usual, or that might otherwise see demand for their products and services rise during the coronavirus crisis.

But not all stocks classified in cyclical sectors have taken part in the corporate debt binge in recent years, and many do have resilient businesses and products that can hold up even in a pandemic and a recession—or at least rebound faster. Without heavy debt loads, the companies can hold on longer until a recovery takes hold.

Barron’s screened for cyclical stocks in the S&P 500 (.SPX) that have long-term debt to equity below the index’s median of 0.5 and have seen their 2021 earnings estimates cut by less than 10% since February. They must also trade for a forward price-to-earnings ratio of less than 20 times. That eliminates the likes of Amazon.com (AMZN), which commands a hefty 64 times forward P/E after rising 32% in 2020.

The screen produced seven names: Best Buy (BBY), Cabot Oil & Gas (COG), Corteva (CTVA), Jacobs Engineering Group (J), L3Harris Technologies (LHX), Newmont (NEM), and Quanta Services (PWR).

Much of the discretionary retail world has suffered during the coronavirus crisis, and the graveyard of bankrupt bricks-and-mortar stores is piling up. But Best Buy has several advantages. Its online presence is far ahead of competitors, and consumers’ needs for new tech to outfit their home offices and improve their stay-at-home entertainment options has kept demand for Best Buy’s products relatively resilient. A low debt load and attractive valuation could make the stock a rare buy in the retail industry today.

Natural gas company Cabot Oil & Gas ironically benefits from a lower oil price. A large percentage of U.S. natural gas production comes as a byproduct of shale oil drilling. As the price of oil has tumbled, some producers have been shutting down their wells. That means less natural gas supply as well, and higher prices. Cabot is in a good position to benefit from that trend.

When the world economy is in a recession, demand tumbles for commodities from copper, to crude oil, to cobalt. Most materials firms are highly sensitive to the health of global manufacturing and industrial production.

Not so for Newmont and Corteva. Gold—the original haven asset—tends to see its price rise when riskier assets fall and investors flock to safety. That’s bullish for gold miner Nemont. And recession or not, people still need to eat. That gives former DowDuPont agriscience business Corteva some resiliency. Farmers still need seeds and fertilizer to grow crops each year.

Having customers that don’t adjust their budgets much based on the economy also helps. Quanta Services provides engineering and construction services for utility companies. And L3Harris is a major defense contractor. You can count on electricity companies and the U.S. military to keep spending this year and next. Jacobs Engineering likewise benefits from having utilities and governments as large customers.

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