Investors are advised to consider integrating counter cyclical stocks into their portfolios, particularly in light of shifting market conditions. Recent analyses suggest that the current climate may be especially conducive for such investments. The U.S. stock market is currently facing significant challenges, most notably the ongoing turmoil related to the Trump 2.0 Tariff policies. These aggressive policy shifts have raised concerns about consumer confidence, which appears to be waning. According to recent reports, the Consumer Confidence Index saw a sharp decline in March, reaching its lowest point since January 2021. Even officials from the Trump administration have conceded that their trade and cryptocurrency policies may induce some short-term economic slowdown, although they maintain that these measures are intended to usher in what they term 'The Golden Age of America' in the long run.

Financial theory, particularly the modern portfolio theory developed by Harry Markowitz in 1952, underscores the importance of diversifying investment portfolios with counter cyclical stocks. This approach is designed to enhance overall risk-adjusted returns and mitigate volatility without compromising return potential. Modern investment literature emphasizes that effective diversification is achieved by including assets whose returns move inversely to one another. Counter cyclical stocks exemplify this principle due to their tendency to exhibit low or even negative correlations with the broader market.

Research indicates that portfolios comprising counter cyclical stocks generally display lower volatility and more stable returns, particularly during recessionary periods—a characteristic that appeals greatly to investors. Esteemed fund manager Peter Lynch has also highlighted the resilience of stable companies during recessions, underlining the value of counter cyclical stocks.

These stocks typically flourish in adverse economic conditions, offering relative stability when market volatility increases. Companies in defensive sectors such as utilities, consumer staples, and healthcare are prime examples, as they provide essential products and services that consumers are likely to purchase regardless of their financial circumstances. Additionally, true counter cyclical stocks often see accelerated growth during downturns, as consumers shift their focus to budget-friendly options—think discount retailers and thrift stores. This inherent stability makes them particularly attractive to investors seeking a safe haven during economic instability.

Recently, we published a comprehensive list of the 11 Best Counter Cyclical Stocks to Buy According to Analysts. In this article, we will delve into where Dollar Tree, Inc. (NASDAQ: DLTR) ranks among these top counter cyclical stocks.

Furthermore, recent business surveys indicate a growing expectation among the public for fewer job opportunities in the coming months. This sentiment is reflected in a noticeable decline in key economic indicators, which has historically foreshadowed the onset of recessions, such as the dot-com bubble burst, the financial crisis of 2008, and the bear market of 2022. It comes as no surprise that research firms like Yardeni Research and Goldman Sachs have recently heightened their predictions regarding the possibility of a U.S. recession in 2025, although the anticipated probability remains below 50% on average.

Potential triggers for this recession could include a one-time inflation shock stemming from the upcoming tariffs, a widespread slowdown in business capital expenditure expectations that might result in layoffs, and a more cautious consumer base reacting to uncertainty and declining purchasing power. Under these circumstances, counter cyclical stocks could experience a significant upsurge in business activity, potentially yielding superior returns compared to wider market trends.

Our methodology for identifying the most promising counter cyclical stocks involved an extensive review of business literature on their defining characteristics. We manually selected 20 to 30 stocks known for their resilience during economic downturns, particularly the bear markets of 2008 and 2022. We then ranked the top 11 based on analyst estimates of average upside potential, providing insights into the number of hedge funds holding these stocks as of Q4 2024.

So, why focus specifically on stocks favored by hedge funds? Research indicates that mimicking the top stock picks of successful hedge fund managers can yield superior market performance. Our quarterly newsletter has successfully selected 14 small-cap and large-cap stocks each quarter and achieved an impressive 373.4% return since May 2014, significantly outpacing its benchmark by 218 percentage points.

So, how does Dollar Tree, Inc. (NASDAQ: DLTR) fare in the context of the best counter cyclical stocks according to analysts?

Dollar Tree, Inc. (NASDAQ: DLTR)

Average Upside Potential: 9.42%

Number of Hedge Fund Holders: 64

As a leading operator of discount variety stores in the U.S. and Canada, Dollar Tree, Inc. operates under the familiar brands Dollar Tree and Family Dollar. The company offers an extensive selection of products, ranging from consumables to household items and seasonal goods, typically priced at fixed low points. During times of economic hardship, Dollar Tree tends to see a surge in customer traffic as consumers gravitate towards more affordable shopping alternatives.

A recent strategic move by Dollar Tree involved the sale of the Family Dollar business to Brigade-Macellum for over $1 billion. This decision will allow each brand to concentrate on its unique requirements and growth potential. The company reported solid Q4 results, with the Dollar Tree brand achieving a 2% growth in comparable sales, attributed to a 0.7% increase in customer traffic and a 1.3% rise in average transaction values. The adoption of a multi-price strategy yielded promising results, with stores following the 3.0 format demonstrating a 220 basis point lift in comparable sales compared to other formats, particularly in seasonal merchandise and everyday essentials.

Dollar Tree has effectively mitigated over 90% of the impact from the initial round of tariffs imposed on Chinese goods. However, additional tariffs slated for March could impose an estimated cost increase of about $20 million per month before any mitigation efforts are applied.

Looking forward to 2025, Dollar Tree anticipates comparable store sales growth ranging from 3% to 5%, with a focus on enhancing its multi-price offerings and fine-tuning store operations. The company plans to convert approximately 2,000 stores to the 3.0 format and open around 300 new locations in 2025. This strategy reflects a strong commitment to growth and operational improvements. Management has emphasized that the separation from Family Dollar will empower DLTR to return to its foundational values while innovating and competing in new arenas, particularly emphasizing its signature value, convenience, and discovery shopping experience.

DLTR has notably outperformed the broader market during the recent bear market of 2022, making it one of the most compelling counter cyclical stocks to consider.

In summary, DLTR ranks 11th on our list of best counter cyclical stocks to buy according to analysts. While we recognize the investment potential of DLTR, our analysis suggests that AI stocks may offer greater opportunities for higher returns within a shorter timeframe. Notably, there is an AI stock that has appreciated since the beginning of 2025, while other popular AI stocks have experienced a decline of around 25%. For those interested in promising AI investments trading at less than five times their earnings, we encourage you to explore our report on what we consider the most undervalued AI stock.

READ NEXT: 20 Best AI Stocks To Buy Now and 30 Best Stocks to Buy Now According to Billionaires.

Disclosure: None. This article was originally published by Insider Monkey.