In 2020, consumer stocks focused on food and staples retailing and personal products received much attention. But now that a mass vaccination drive is picking up pace, the new Presidential administration is moving ahead with a large COVID-19 relief package, and a low interest rate environment is not expected to change anytime soon, optimism is rising for strong economic recovery this year. With this, investors have begun to show an interest in cyclical stocks that may provide solid upside due, in part, to an investor rotation.
A cyclical stock is one whose underlying business generally follows the macroeconomic cycle of expansion and recession. These stocks tend to perform well during expansions with solid sales and earnings growth. Consumer cyclical stocks rely heavily on consumer spending. A shift in consumer spending habits can now be seen as the economy begins reverting to the ‘old normal’ in terms of people’s lifestyles. So, as the nation enters the early expansion phase, cyclical stocks should perform well.
President Biden’s current stimulus proposal if passed will provide a large percentage of the population with $1,400 stimulus checks. In addition, $400 federal unemployment benefits and a gradual increase in the minimum wage to $15 per hour are anticipated. The new administration is also reviving talks about an infrastructure stimulus package. These moves should increase consumer spending.
As consumer confidence and purchasing power increase, we think top-rated cyclical stocks Turtle Beach Corporation (HEAR), Big 5 Sporting Goods Corporation (BGFV) and Escalade, Incorporated (ESCA) should garner investor attention because of their sound business models and compelling growth drivers.
Turtle Beach Corporation (HEAR)
HEAR is one of the world’s leading gaming accessory providers. The company is known for pioneering first-to-market features and patented innovations in high-quality, comfort-driven headsets for all levels of gaming, including video game and entertainment consoles, handheld consoles, personal computers, and mobile and tablet devices. It serves retailers, distributors, and other customers in North America, South America, Europe, the Middle East, Africa, Australia, and Asia.
HEAR has recently entered a new partnership with Oakley, a leader in sport performance and optical innovation. The partnership pairs HEAR’s expertise in creating high-quality, glasses-friendly gaming headsets with Oakley’s quest for optimized vision and performance in its eyewear collection. On January 13, HEAR acquired Neat Microphones, a maker of high-quality digital USB and analog microphones. The acquisition facilitates HEAR’s entry into the $2.3 billion global microphone market and expands the company’s total addressable market for its brands. With this deal, HEAR is adding 40 Neat patents and nearly 70 Neat trademarks to its portfolio.
HEAR is scheduled to report its fourth quarter and full-year 2020, ended December 31, 2020. earnings report on March 4. Based on preliminary unaudited information, HEAR expects to report full-year 2020 sales of $358 -$360 million, compared to $234.7 million in the prior year. This reflects an increase of more than 52%. According to CEO Juergen M. Stark, “Driven by our exceptionally strong operational execution in a robust market for gaming accessories, our sales and adjusted EBITDA reached record levels in 2020.” In addition, the company more than doubled its sales of ROCCAT PC accessories.
HEAR ended the year with $46 million in cash, no debt and a strong platform for expanding into new product categories and continuing to grow the business. Its full-year EPS is expected to be $2.26 – $2.35, compared to the year-ago value $1.04.
The coronavirus pandemic triggered a rally of gaming stocks because the lockdown measures compelled by the public health crisis forced people to spend more time at home, with many turning to online gaming for entertainment. As a result, the stock is up a whopping 360.4% in the past year. There has been a dramatic influx of new gamers into the market in recent years, as well as renewed interest on the part of existing gamers. New Xbox Series and PS5 consoles have seen extremely strong consumer demand but limited supply, which should fuel continued robust sales of consoles and console accessories in 2021. Analysts further expect HEAR’s full-year 2020 revenue and EPS to grow 52.8% and 234.4%, respectively.
HEAR’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
HEAR has an A grade for Momentum, and a B for Value. Of the 43 stocks in the A-rated Technology – Electronics industry, it is ranked #21.
In total, we rate HEAR on eight different levels. Beyond what we stated above, we have also given HEAR grades for Growth, Stability, Sentiment and Quality. Get all HEAR’s ratings here.
Big 5 Sporting Goods Corporation (BGFV)
BGFV is a leading sporting goods retailer in the western United States, operating 431 stores in 11 states. The company provides a full line of products at compelling values, including athletic shoes, apparel and accessories, as well as a broad selection of athletic equipment. BGFV also operates an e-commerce platform under the Big 5 Sporting Goods name.
BGFV expects to issue earnings results for the fiscal 2020 fourth quarter and full year, ended January 32021, in early March 2021. According to a preliminary report, BGFV’s revenue increased nearly 19% year-over-year, in the fourth quarter, to $290.5 million. This can be attributed primarily to a2.4% expansion in merchandise margins and increased operating leverage from its improved cost structure. Its same store sales increased 10.5% year-over-year. Its total merchandise inventories decreased by approximately 19.2% compared to the prior fiscal year, and it ended the year with no borrowings under its credit facility. However, the company did not report EPS but expects it to be in a range of $0.90 – $0.93.
BGFV has gained nearly 330% in the past year. Over the course of the year, BGFV has continued to strengthen its balance sheet, growing its cash balance and effectively managing its merchandise inventory. The company reported an exceptional third quarter, which represented its strongest sales and earnings performance in its 65-year history. In line with its continued earnings momentum, analysts expect its current quarter (ending March 2021) revenues and EPS to grow 12.8% and 130%, respectively.
BGFV’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, which equates to Strong Buy. BGFV has an A grade for Growth, Momentum and Quality. It is ranked #1 of #33 stocks in the Athletics & Recreation industry. The industry is also rated A.
In addition to the POWR Ratings grades I’ve just highlighted, you can see the BGFV’s ratings for Value, Stability and Sentiment here.
Escalade, Incorporated (ESCA)
ESCA is a global manufacturer and distributor of sports and outdoor recreational equipment that operates in North America, Europe, and internationally. The company manufactures, imports, and distributes various sporting goods brands. ESCA is a leader in table tennis tables, residential in-ground basketball goals, and in archery bows.
In December 2020, ESCA acquired all of the business and assets of Revel Match LLC, dba RAVE Sports, a brand known for its innovative and high-quality water recreation products. The deal provides dynamic portfolio expansion and signals ESCA’s entry into the growing water sports market. It also further expands the company’s powerful stable of recreational brands and positions the company for continued revenue and profit growth.
For its fiscal fourth quarter, ended December 26, 2020, ESCA reported record revenue of $74.8 million, surging 59% year-over-year. The company recognized increased sales across all product categories during the quarter due to increased product placement and continued high demand, most notably in its outdoor and fitness categories. Its EPS for the quarter was $0.36, doubling from the year-ago value of $0.18.
The stock has surged nearly 140% in the past year; ESCA has delivered four consecutive quarters of record revenue. This signifies the company’s sustainable business model, which is built on the back of an accelerating product and asset creation pipeline. ESCA has enhanced its strong balance sheet and increased its financial flexibility for further strategic investments. In line with the progress, Wall Street analysts expect ESCA’s EPS to grow at a rate of 15% per annum over the next five years.
It’s no surprise that ESCA has an overall rating of B which translates to a Buy in our POWR Ratings system. ESCA has a B grade for both Value and Momentum. It is currently ranked #18 in the Athletics & Recreation industry.
Click here to see the additional POWR Ratings for ESCA (Growth, Quality, Stability, and Sentiment).
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
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HEAR shares were trading at $32.67 per share on Monday morning, down $0.43 (-1.30%). Year-to-date, HEAR has gained 51.60%, versus a 3.58% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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