Are these the best cyclical shares to watch in March 2024?

Some company fortunes – and therefore their shares – rise and fall depending on the state of the economy. This is because demand for their goods is often discretionary and dependant on the money in consumer’s pockets or government buying cycles. These types of companies are described as ‘cyclical’ because their turnover and profit growth tends to follow the economic cycle.

Sectors which are cyclical include financials, luxury goods manufacturers, travel and automobile companies, and advertising.

The opposite of ‘cyclical’ stocks is defensive stocks, which are always in demand, such as those in the tobacco and healthcare sectors.

Here are what we think may be some of the five best cyclical stocks to watch. These have been selected for recent market news.

Always do your own research. Past performance is not a guide to future performance.

Best cyclical shares to watch

1. Burberry

2. Rightmove

3. Barclays

4. On the Beach

5. ITV

Burberry (LON: BRBY)

Shares in Burberry were hit for six last year after the company released a profit warning. The luxury retailer admitted it may miss its sales targets for the full year. Typically, higher end clientele tend to be more insulated from financial crises than other customers. However, the current high interest rate environment is meaning its clients are cutting back on their discretionary spending. Other luxury goods brands, such as LVMH and Gucci, have reported similar issues. Burberry has also been hit by the slow return to normality in its Chinese markets following the Covid lockdowns there.

Shares in the company are down a painful 47% to 1338p. However, once the world economies start to recover, Burberry’s customers should return. The shares, which yield 4.5% and are trading on a price earnings ratio of just 11, could be worth watching. Analysts at broker Barclays have an equal weight recommendation and a price target of 2,230p on the shares.

Rightmove (LON:RMV)

The UK housing market has slowed due to the interest rate hikes last year and economic environment. Yet, strangely enough, Rightmove actually benefited from estate agents struggling, as they took on more premium packages from the company. At the half-year results, revenues rose 10% to £179.5 million (from £162.7 million in 2022), while pre-tax profits increased to £130.3 million (from £121.2 million in 2022).

The shares are down 6% this year to 554p but are worth keeping an eye on as the economy improves and interest rates ease. They are trading well off their five years highs of 803p. Chancellor Jeremy Hunt currently expects inflation to fall in the early summer and the cost of a number of mortgage products is falling already.

Barclays (LON:BARC)

Banks and financial firms are included among cyclical stocks because their fortunes are also tied to the performance of the economy. While they may benefit from higher interest rates, they can also be negatively affected by customer defaults, the housing market and poor stock market performance.

Barclays’s valuation is struggling to recover from issues in its investment banking arm. The shares trade on a price earnings ratio of just 4 – about half that of its peers. However, the bank has just announced it will return £10 billion to shareholders over the next three years via buybacks and dividends and unveiled a new strategic plan to turn its fortunes around.

Chief executive CS Venkatakrishnan also plans to cut £2 billion of costs by 2026 and hopes a recovery in deal-making will boost revenues. The shares are down 7% this year to 161p but are worth watching.

On the Beach (LON:OTB)

Travel companies like On the Beach tend to be reliant on the vagaries of the economy and consumer spending to outperform. However, despite the cost of living crisis, a number of hoteliers, including On the Beach are performing well due to their continued bounce-back from Covid.

What’s more, it’s thought that some consumers are deciding that their summer holiday is sacrosanct, whatever the state of the economy, and are prepared to cut back elsewhere to ensure that it goes ahead.
The holiday provider is seeing strong growth in bookings, despite the recession. The company said at its recent AGM update that it had a record forward order book, with the total transaction value (TTV) of holidays sold up 27% up on the same period last year.

Meanwhile, chief executive Shaun Morton says that the company’s TTV for summer 2024 will be “significantly ahead of summer ‘23.” The shares trade on a price earnings ratio of 22 but are worth watching.

ITV (LON:ITV)

ITV produces content for not just its own TV channels but also other companies, including the BBC, Amazon Prime and other US TV firms including Peacock. It also recently launched its own streaming service, ITVX, which it says is performing well.

The shares are cyclical because the company makes part of its revenues from advertising sales. Although the terrestrial television sector has been hit by the popularity of streaming services, ITV says revenues from its ITV Studios arm and its Media and Entertainment business are “more than offsetting” the decline in linear advertising sales.

The advertising market is struggling at the moment but should return to health as the economy improves. The shares are down by a third this year to 57.74p but are worth keeping an eye on. Analysts at broker Deutsche Bank currently have a buy rating on them.

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Top cyclical stocks to watch summed up

These are just a small selection of some of the best cyclical stocks to watch. Always do your own research. Past performance is not a guide to future performance.

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