Tom Yeung here with this week’s Sunday Digest.
In 2022, commodity stocks were in trouble.
The U.S. had just posted two quarterly GDP declines — a first since the COVID-19 recession — and people were forecasting even more trouble. Shares of economically sensitive companies like copper miner Freeport–McMoRan Inc. (FCX) fell as much as 50%.
Yet, InvestorPlace Senior Analyst Eric Fry – our global macro specialist –saw things differently.
After all, economic cycles are like watching the tide come in and out. Good times are followed by bad, and bad times eventually cycle back to good. The only thing more predictable than market cycles is people forgetting about market cycles (and neglecting to bring in beach chairs for high tides).
In addition, demand for commodities like copper was surprisingly stable thanks to rising electric vehicle demand in China. Each EV uses around 130 pounds of copper, more than twice what a traditional vehicle consumes.
Here’s what Eric wrote in Leverage that year (subscription required):
Yes, demand is falling for many goods and services, and will continue to fall for many of them, but not all of them. Copper demand, for example, has been flat-lining for the last few months, but it is certainly not imploding…
Copper-intensive green industries like EVs, solar power, and energy storage haven’t taken a break. Despite sluggish economic conditions, global demand for green technologies and products continues to power ahead.
The trend is undeniable… and it points quite clearly to booming demand for battery metals like copper.
To ride this wave, Eric recommended investors double down on their FCX shares in Fry’s Investment Report (subscription required). And indeed, shares of the world’s lowest-cost copper miner have risen 50% since he made that call.
But Eric also made a second investment in FCX that did even better. That’s because cyclical firms like Freeport usually trade in a predetermined range (much like high and low tides at a beach). And his way to turn these 50% gains into even more significant profits was to use a little bit of leverage.
In Eric’s case, he recommended his Leverage members buy long-dated options, namely calls expiring nearly two years later.
Eric took profits along the way to those FCX calls’ expiration date when copper prices were high. Between August and December of 2023, Eric sold off a few positions at an average price of $12.93, a 119% return on his members’ initial $6.10 investment!
Of course, not every investor wants to wait 12 months or more for options to mature… even when 100%-plus returns are on the table. That’s because improvements in quant-focused tools are now helping investors predict each wave in a rising tide.
That’s created a bonanza in shorter-term options. These volatile assets can see prices move tenfold or more a single trading day.
That’s why I think it’s essential that you make time for Jeff Clark’s special webinar next Wednesday, January 22, at 1 p.m. Eastern. (You can save your spot now by going here.)
For 42 years, master trader Jeff Clark has helped folks turn volatility into profits.
First as money manager in Silicon Valley… then as one of the country’s most widely followed trading experts.
For example, he warned of the 2008 financial crisis before it happened.
And between 2007 and 2009, while buy-and-hold investors lost their shirts, he gave his newsletter subscribers the chance to make triple-digit gains 25 times.
Now, in his new presentation, this short-term options guru – who recently became an InvestorPlace corporate partner – talks about how investors can use short-term trades to turn small sums into 100%… 200%… even 500% returns. He focuses on getting into a position one day, and getting out with big gains a few weeks later.
You can reserve a seat for Jeff’s broadcast here.
Now, that level of risk might not be for everyone. Higher potential returns do come with larger risks.
So, in the meantime, I’ve assembled a list of five cyclical stocks to buy that look much like Freeport-McMoRan in 2022.
These are five firms with significant upside now… and the potential for even greater gains with the leverage of options.
Let’s take a look…
5 Top Cyclical Stocks to Buy
To find these high-quality cyclical firms, I applied four criteria:
- Upside. These firms must score an “A” or “B” in Louis’ Stock Grader (subscription to any Navellier service required). This proven quantitative system has long been a solid predictor of future gains, thanks to its focus on institutional fund flows, fundamental quality, and other critical factors.
- Quality. Companies must have “moats” around their businesses that protect them during low-cycle moments. Buying cyclical companies is pointless if the firms can’t survive the next inevitable downturn.
- Cyclicality. The firm’s industry must demonstrate an ability to bounce back. I exclude any “sunset” industries that are trending downward into oblivion.
- Timing. The company must trade within 30% of its 52-week low. This prevents us from buying shares of cyclical companies at the top of the market.
As I did my analysis, it became clear that companies in two very different industries emerge as potential winners.
Trading Firms
The first of these companies involve trading firms recently selling off from the post-election drop in market volatility. I see these firms surging back with a vengeance once Donald Trump is back in the White House.
1. CME Group Inc. (CME). This A-rated financial exchange has historically performed best during rising markets and periods of high volatility. Shares cyclically peaked in 2007, 2019, and 2022. Given the unpredictability of an incoming Trump administration, 2025 will likely be another banner year.
In addition, CME has an incredibly wide moat thanks to its leading position in U.S. futures contracts. The Chicago-based exchange has exclusive licenses to issue futures contracts on the S&P 500, Russell 2000, and Nasdaq indexes, and more than 95% of all U.S. interest-rate futures trade on CME’s exchange.
It’s also important to note that the firm is also a leader in retail-focused equity derivative products. CME’s “micro E-mini” S&P 500 contracts are wildly popular among retail investors for their lower entry price.
A recent selloff in December now puts shares within 20% of CME’s 52-week low.
2. Cboe Global Markets Inc. (CBOE). This B-rated commodities exchange has also sold off in recent months. Shares trade within 16% of their 52-week low.
That could quickly change with a new administration. Cboe is particularly strong in options, and has proprietary ownership over options on the S&P 500 Index (SPX) and the Cboe Volatility Index (VIX). That means Donald Trump’s second term in office could send shares to new heights.
There is precedent for this bullishness. Trump’s first term in office propelled CBOE to a 90% gain within 12 months, thanks to record trading in SPX and VIX options. Shares also performed well during the 2013 “taper tantrum,” the 2021 “everything bubble,” and the 2023 pivot from rising interest rates to flatlining ones. That’s why investors should see the company’s recent selloff as an opportunity to buy CBOE cheaply.
Power Generation Firms
My other three cyclical stocks to buy involve power production – a typically cyclical business despite their natural monopolies.
Rate increases are negotiated annually with regulators, and worse-than-expected contracts can result in millions of lost dollars. Some of this volatility is hedged through buying energy futures, but 100% of costs can’t be absorbed this way. (No energy company wants to over-hedge their positions if energy demand suddenly drops.)
We’re beginning to see a new upcycle in the industry. Some power generation regions, like Texas and the Mid-Atlantic, have already seen a resurgence in energy prices thanks to AI data centers. These cloud computing sites require enormous amounts of energy, and contract prices in some areas like Pennsylvania, New Jersey, and Maryland (PJM) have seen wholesale energy prices rise ninefold since 2023.
This cyclical improvement will almost certainly expand across America. Cloud computing firms continue to spend billions of dollars on new AI-focused data centers, and analysts expect these power-hungry installations to consume up to 8% of U.S. power by 2030.
In addition, the U.S. began facing La Niña conditions this month, which typically bring colder-than-average winters to North America and much of Western Europe. This increases energy demand, providing windfalls for power generation companies that have locked in costs.
Companies like Vistra Corp. (VST), which serves the Texas market, have seen shares double since September, leaving far less upside on the table.
Fortunately for us, three of Stock Grader’s highly rated firms have yet to break out of their cyclical lower-band.
3. DTE Energy Co. (DTE). The B-rated Michigan-based power generation company is expected to see profit margins rise from the 7% range to 11% over the next several years. Michigan’s aging utility infrastructure needs investment, and analysts expect this to allow DTE to negotiate better rates. Additionally, DTE is replacing its older coal-fired power plants with newer gas and renewable-powered ones. Over the long run, this will help reduce fuel, operation, and maintenance costs.
These efforts will drive significant increases in earnings per share – a historical sign of future gains. Analysts expect EPS to surge 17.5% this year and maintain a 7% growth rate after that. Louis’s proprietary system awards DTE Energy “A” grade on operating margins growth and earnings growth.
Finally, DTE trades within 20% of its 52-week low after a selloff in October, giving it upside within its trading band.
4. Duke Energy Corp. (DUK). B-rated Duke Energy is one of America’s largest regulated utilities. The firm generates most of its profits in Florida, and the outlook in its largest service territory, North Carolina, has improved significantly. As analysts at Morningstar recently noted:
Duke recently received constructive outcomes at both its Carolina utilities, which included increases in allowed returns on equity and thicker equity layers. State legislation also allows for performance incentive mechanisms, usage-decoupled rates for residential customers, and supports utilities’ investment to meet the state’s clean energy targets.
Duke Energy is also fortunate to serve some of America’s fastest-growing regions. The Florida Chamber of Commerce believes its state population will surge to 27 million by 2030, up from 22.6 million. North Carolina is projected to become the seventh most populous state in the coming decade thanks to a surge in urban migration (it’s now in the No. 9 slot).
That suggests Duke’s projections for a 1.5% to 2% annual growth forecasts are far too low. In fact, analysts expect data center demand alone to make up 10% of the company’s commercial load by 2028, up from 3% today – figures that suggest closer to a 3% to 4% long term growth rate. Shares additionally trade within 20% of their 52-week low.
5. Dominion Energy Inc. (D). Finally, B-rated Dominion Energy has some of the industry’s best exposure to AI data centers. The firm is the largest electricity provider in Virginia, whose D.C. exurbs have become a hub for AI-related data centers thanks to the region’s fiber optic network infrastructure. Smaller data center providers have also moved to Northern Virginia for faster connections to larger cloud computing centers. The Department of Energy estimates that the amount of power consumed by data centers could quadruple by 2030, leading them to consume as much as 50% of Virginia’s electricity.
That gives Dominion an unusually high growth rate, even compared to DTE and Duke. Analysts expect earnings per share to rise 17% over the next three years – faster than what many tech companies see. And thanks to Dominion’s long history of bouncing back from cyclical lows, we believe the recent 10% selloff provides an opportunity to buy shares at a discount.
Using Leverage Wisely
Now that we’ve talked about these five high-quality picks, I’ll now reveal a small secret about the group:
There were actually five criteria involved in picking them.
The final benchmark I used was Implied Volatility, a measure of a stock’s options prices. The lower the number, the cheaper the options are (and the better their upside). All these firms have figures below “30.” For comparison, Nvidia Corp.’s (NVDA) figure is 40.0.
In other words, these five companies are much like Freeport-McMoRan regarding options too. Markets are so downbeat about these cyclical firms recovering that even long-dated options are at a discount.
But before I go any further, I know that the world of options can seem overwhelming.
There are strike prices… expiration dates… gamma… theta decay… not to mention the possibility of an options contract blowing up a portfolio.
But much like kitchen knives or chainsaws, options are handy tools if used correctly (i.e., never sell an option unless you’ve hedged your exposure). These contracts can turn a low-return investment that should be ignored into a high-return one.
To help you learn what to do (and the risky strategies to 100% avoid), I urge you to save your spot for Jeff Clark’s presentation on Wednesday, where he reveals his methods for finding upside while limiting the downside.
Jeff has made more than 1,000 winning trade recommendations by trading market volatility.
He’s also traded through 11 presidential inaugurations.
So, I can’t think of a better person to help us figure out how to profit from Trump’s first 100 days than Jeff.
Jeff is hosting a special webinar all about it on Wednesday, January 22, at 1 p.m. ET… so be sure to reserve your spot for his The Most Profitable 100 Days of Your Life event right here.
And I’ll see you back here next Sunday.
Regards,
Thomas Yeung
Markets Analyst, InvestorPlace