3 Cyclical Stocks to Lead the Market Into the New Year

The economy moves in a cyclical fashion in four major stages — expansion, peak, contraction and trough. For cyclical stocks, this can mean great outperformance in times of expansion. However, when things peak and start to come down, we see the kind of performance we’ve seen thus far this year. Thus, it’s been difficult to be a cyclical growth investor in 2022, to say the least.

Now, the question many investors have is just how long this contraction will be, before we see the next trough. While some are calling for the bottom to be in, others aren’t so sure.

That said, timing the bottom of the market is difficult. Most long-term investors try to adhere to the age-old principle that “time in the market beats timing the market.” However, that’s easier said than done.

The market appears to be in a clear stage of contraction, and may remain in this stage for some time. If the Federal Reserve keeps rates sufficiently restrictive, as they say they are going to do, it’s hard to say how long we’ll be in this period of no man’s land.

That said, for those who think cyclical stocks are due for a bounce eventually, it’s best to buy these stocks when they are at their lowest. Accordingly, when the next expansion hits, investors will be poised to maximize their gains.

Here are three top cyclical stocks to buy for those looking to do just that.

Toronto-Dominion Bank (TD)

Perhaps a lesser-known bank to many investors, Toronto-Dominion Bank (NYSE:TD) is one of the largest financial institutions in Canada. The company provides a wide range of services under the banner of TD Group. However, TD will soon complete its $13.4 billion acquisition of First Horizon (NYSE:FHN), increasing the company’s market share in the U.S. substantially.

The deal is likely to close by the first quarter of 2023. This is an all-cash transaction, made possible due to the bank’s powerful fundamentals. Shareholders of First Horizon have already voted in favor of the acquisition. They are now waiting for the regulatory bodies to approve the move.

With this move, TD’s U.S. franchise will become one of the top 6 banks in the US. Notably, the lender has a considerable grip in the southeast region. Memphis is widely expected to be the regional hub for TD group (a surprise to some).

Indeed, the sooner this acquisition happens, the better for TD. If the deal does not occur before the end of November, First Horizon shareholders will get 65 cents per share on an annualized basis from Nov. 27 through the day immediately prior to closing. Also, the transaction will be voided if not completed before Feb. 27 of next year.

The company’s third-quarter results were strong, with TD bringing in adjusted earnings at $3.8 billion, representing 5.1% year-over-year growth. Those looking for a cyclical stock with significant growth upside may want to take a look at this lesser-known large-cap name.

Shopify (SHOP)

Sticking with the Canadian trend for a minute,  Shopify (NYSE:SHOP) is another company most would consider among the cyclical stocks to buy, for those betting on a rebound next year. This company’s e-commerce platform, which allows small and medium-sized businesses to set up online stores, surged during the pandemic. However, with pandemic-driven tailwinds now in the rear-view mirror, this company’s growth has slowed.

Much of this has to do with the macro environment shifting dramatically. The shopping mix (online vs. in-person) is creeping back to its old ratio. Thus, Shopify’s growth prospects have taken a hit.

That said, over the long term, it’s clear that e-commerce growth trends remain intact. This is a secular growth area of the economy I think investors would be remiss to ignore.

Shopify’s new CRM (customer relationship management) technology, Shopify Plus, will help most small-scale businesses offer a comprehensive service, cutting down costs considerably. Shopify also has the required funds to execute additional product improvements and enhancements. With strong fundamentals, Shopify is a stock that’s about as cyclical as investors can get, trading at a relatively attractive valuation today.

Alphabet (GOOG)

Last on our list of cyclical stocks to buy is global technology giant Alphabet (NASDAQ:GOOG).

Many may think of Alphabet’s core Google business as being highly defensive. In many respects, it is. Folks will use Google in good times and bad, with this search engine being among the first choices for advertisers looking to sell their products or services.

However, like other tech companies that have been hit hard of late, investors have reason to be concerned. From a valuation standpoint, GOOG stock has always traded at a premium. That said, this company’s multiple, like most stocks in the market, has begun to be challenged by investors. As interest rates remain high, it’s easy to make the case that this stock needs to come down further.

From a cyclical business standpoint, advertisers simply tend to spend less in times of contraction. When business is poor, extraneous spending gets cut. That may mean a greater focus on profitability over growth, leading to a decline in Alphabet’s overall business.

Now, this is a company that’s much more than a search giant. There are other business that could pick up the slack in downturns, and that’s looking to be the case. I think over the long term, GOOG stock stands as a gem worth holding right now.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.