Time to go 'cycle-ing'? The case for economically sensitive stocks

With economic growth slow, stocks that are highly economically reliant have not performed especially well. But that may have created opportunities in these so-called cyclical stocks, according to RBC Capital Markets.

One of RBC's top ideas for 2016 is for investors to find "cyclical opportunities."

"Despite the lackluster environment for economically sensitive stocks, we see opportunities to invest in these high-quality cyclical companies, where negative sentiment in their respective sectors have created an undue discount to their longer-term franchise values," a team led by RBC's head of global research, Marc Harris, wrote in the introduction to a recent omnibus research note.

Specific cyclical stocks touted by RBC include Canadian National Railway and home appliance maker Whirlpool.

Whirlpool may be considered a classic cyclical name. As the economy improves, more Americans are likely to buy refrigerators, dishwashers and other products made by the company. Because of this tight relationship between the stock and the economy, it indeed tends to gain much more than the S&P 500 when stocks rise, and fall much more when the market drops (as we can deduce from a calculation known as "beta").

In 2015, shares of Whirlpool have fallen by 25 percent.

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Whirlpool clothes dryers on sale in San Francisco.
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Whirlpool clothes dryers on sale in San Francisco.

For Max Wolff, chief economist at Manhattan Venture Partners, it might behoove investors to dip a toe into cyclicals, as long as they keep the rest of their foot somewhere else.

"We do think the best of the cycle is behind us," Wolff said in a Friday interview on CNBC's "Trading Nation." "That being said, there's mounting evidence that some of these better names are oversold on general pessimism. But I'd want to be short the weaker names, and to be long the better names, and I'd be looking to make my money and get out on a trading basis."

RBC's thesis is "OK in the short term," Wolff surmised. "Long term, I'd be nervous."

Looking specifically at shares of Whirlpool, Piper Jaffray technical analyst Craig Johnson said in the same segment that "it doesn't look like any sort of low as been set yet."

"It's hard to say where we are in the cycle," Johnson said. But either way, "there are better opportunities in the market."


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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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