Several economic, political, and industrial factors, as well as investor sentiment, influence the stock market. The way these factors play out drives the market cycles of rallies, peaks, dips, and bottoms out. Thus, the age-old investment strategy to buy the dip and sell the rally works because nobody can time the peak and bottom.
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The sectoral cycles within market cycles
Individual sectors of the stock market may react differently to different situations. While one stock may be at its peak, the other may be falling. To give you a very crude example, renewable energy stocks fell when oil stocks rallied. Another example is automotive and grocery stocks. At a time when high inflation reduced consumers’ purchasing power, demand shifted from discretionary spending to essentials.
While the combined performance of these sectors influences the TSX Composite Index, you can navigate the market cycles by investing in uncorrelated and contrarian sectors. Suppose you have invested in both automotive and grocery stocks: one’s dip is offset by the other’s rally.
That is a sectoral play, which can help you benefit from market cycles. However, a few companies have exposure to multiple sectors, which helps them balance the industrial cycles and generate profits across all market cycles. Even these stocks have risks, but they far outweigh the rewards.
Two stocks to own in all market cycles
Several companies act as supporting agents that facilitate multiple sectors. These supporting agents themselves are an industry, like technology, logistics, or utilities. However, their diversified client base helps them withstand dips and grow in market peaks.
Utility stocks
Utility stocks are a good investment for their dividends. Emera (TSX: EMA) holds three gas utility companies, each in the United States and Canada. Some of these companies are vertically integrated, which means they produce, store, transmit, and distribute natural gas to households, corporations, and industries.
Emera is not affected by sectoral cycles. However, it is influenced by climate and the regulated base rate for natural gas. In winter, natural gas consumption increases, earning Emera more cash flow through higher utility bills. It allocates capital to expand plant and distribution lines, thereby increasing its customer reach and cash flows. The money earned from the utility bills is used to pay debt, reinvest in the business, and pay dividends.
Emera has grown its dividends in 23 out of the last 25 years of its dividend-paying history. Its share price fluctuates depending on energy prices and the implementation of the projects. However, it can keep paying dividends in every market cycle.
Technology stock to navigate market cycles
Descartes Systems
Among technology stocks, Descartes Systems (TSX: DSG) provides software that helps companies meet their logistics and supply chain management needs. Its client base is spread across oil and gas, e-commerce, airlines, and more. Descartes helps companies with route planning, inventory management, tracking trucks, customs compliance, and more. Its stock is unaffected by sectoral cycles.
However, major macroeconomic factors such as global tariffs pull down Descartes Systems’ share price. Tariffs also bring opportunity as Descartes can offer solutions to companies to navigate through these trade complexities. The stock can withstand market dips and rallies and surge during market peaks.
Constellation Software
Another stock with a diversified cash flow is Constellation Software (TSX: CSU). It acquires software companies that have mission-critical applications and cater to various verticals, like agriculture, healthcare, financial services, utilities, real estate, and more. Constellation allows these companies to operate individually, providing administrative support.
Since these software applications are sticky, they generate recurring cash flow. Constellation uses these cash flows to buy new companies. Its diversified portfolio gives it exposure across all sectors and helps it grow in each market rally.
