Saturday, January 30, 2016

The Ups And Downs Of Investing In Cyclical Stocks


Courtesy : Investopedia


Imagine being on a Ferris wheel: one minute you're on top of the world, the next you're at the bottom - and eager to head back up again. Investing in cyclical companies is much the same, except the the time it takes to go up and down, known as a business cycle, can last years.
What Are Cyclical Stocks?Identifying these companies is fairly straightforward. They often exist along industry lines. Automobile manufacturers, airlines, furniture, steel, paper, heavy machinery, hotels and expensive restaurants are the best examples. Profits and share prices of cyclical companies tend to follow the up and downs of the economy; that's why they are called cyclicals. When the economy booms, as it did in the go-go '90s, sales of things like cars, plane tickets and fine wines tend to thrive. On the other hand, cyclicals are prone to suffer in economic downturns. 

Given the up-and-down nature of the economy and, consequently, that of cyclical stocks, successful cyclical investing requires careful timing. It is possible to make a lot of money if you time your way into these stocks at the bottom of a down cycle just ahead of an upturn. But investors can also lose substantial amounts if they buy at the wrong point in the cycle. 

Comparing Cyclicals to Growth Stocks

All companies do better when the economy is growing, but good growth companies, even in the worst  conditions, still manage to turn in increased earnings per share year after year. In a downturn, growth for these companies may be slower than their long-term average, but it will still be an enduring feature.

Cyclicals, by contrast, respond more violently than growth stocks to economic changes. They can suffer mammoth losses during severe recessions and can have a hard time surviving until the next boom. But, when things do start to change for the better, dramatic swings from losses to profits can often far surpass expectations. Performance can even outpace growth stocks by a wide margin.

Investing in Cyclicals
 
So, when does it pay to buy them? Predicting an upswing can be awfully difficult, especially since many cyclical stocks start doing well many months before the economy comes out of a recession. Buying requires research and courage. On top of that, investors must get their timing perfect.

Investment guru Jim Slater offers investors some help. He studied how cyclical industries fared against key economic variables over a 15-year period. Data showed that falling interest rates are a key factor behind cyclicals' most successful years. Since falling rates normally stimulate the economy, cyclical stocks fare best when interest rates are falling. Conversely, in times of rising interest rates, cyclical stocks fare poorly. But Slater warns us to be careful: the first year of falling interest rates is also unlikely to be the right time to buy. He advises that it's best to buy in the last year of falling interest rates, just before they begin to rise again. This is when cyclicals tend to outperform growth stocks.
Before selecting a cyclical stock, it makes sense to pick an industry that is due for a bounce. In that industry, choose companies that look especially attractive. The biggest companies are often the safest. Smaller companies carry more risk, but they can also produce the most impressive returns.
Many investors look for companies with low P/E multiples, but for investing in cyclical stocks this strategy may not work well. Earnings of cyclical stocks fluctuate too much to make P/E a meaningful measure; moreover, cyclicals with low P/E multiples can frequently turn out to be a dangerous investment. A high P/E normally marks the bottom of the cycle, whereas a low multiple often signals the end of an upturn.

For investing in cyclicals, price-to-book multiples are better to use than the P/E. Prices at a discount to the book value offer an encouraging sign of future recovery. But when recovery is already well underway, these stocks typically fetch several times the book value. For instance, at the peak of a cycle, semiconductor manufacturers trade at three or four times book value.
Correct investment timing differs among cyclical sectors. Petrochemicals, cement, pulp and paper, and the like tend to move higher first. Once the recovery looks more certain, cyclical technology stocks, like semiconductors, normally follow. Tagging along near the end of the cycle are usually consumer companies, such as clothing stores, auto makers and airlines.

Insider buying, arguably, offers the strongest signal to buy. If a company is at the bottom of its cycle, directors and senior management will, by purchasing stock, demonstrate their confidence in the company fully recovering.

Finally, keep a close eye on the company's balance sheet. A strong cash position can be very important, especially for investors who buy recovery stocks at the very bottom, where economic conditions are still poor. The company having plenty of cash gives these investors more time to confirm whether their strategy wisdom was a wise one.

Conclusion
Don't rely on cyclicals for long-term gains. If the economic outlook seems bleak, investors should be ready to unload cyclicals before these stocks tumble and end up back where they started. Investors stuck with cyclicals during a recession might have to wait five, 10 or even 15 years before these stocks return to the value they once had. Cyclicals make lousy buy-and-hold investments.


96 comments :

  1. Dear sir,
    Your views on arrow textiles & bsl please

    ReplyDelete
  2. Excellent way to learn so many thing . Hats off VP Sir . Teaching us in Humble way. Regards.

    ReplyDelete
  3. Please share your views on Jubilant Life, Websol, Orchid Chem, mindtek.

    ReplyDelete
    Replies
    1. Already expressed my view on all these stocks

      Delete
  4. Dear Sir
    Please tell me about Atul Auto Share, I bought at Rs 652 in December 2014, whether it is worth-full to hold it or should I quit from this?

    ReplyDelete
    Replies
    1. Atul Auto suggested @ Rs.16 ( Adjusted to bonus and rights issue) . Neutral at CMP.

      Delete
  5. Sir please give your current view on YES BANK after their latest result

    Thanks

    ReplyDelete
    Replies
    1. Yes bank suggested around Rs.290 level and neutral at CMP. Prefer to take some exposure in IDFC bank with a 5+ years view.

      Delete
    2. How about Lakshmi Vilas Bank at current level, It seems the LVB is comparatively better in NPAs.

      Delete
  6. Sir really good article. I have one doubt even some company posted good results its price is very low for example if we take LT Holding Finance it has shown good profit but still the price is around 60, but some company has profit only half of the profit of LTHF but it is trading around 2000. What is the reason for that.

    ReplyDelete
  7. Sir, am hoping that revenue/ sales realization for the sales SKM made in November / December will shore up the bottom line for Q4. I hope they make the 300cr mark.

    ReplyDelete
    Replies
    1. What is the relation between Nov,December sales and 4th quarter ?

      Delete
  8. VP sir, Please give your view on Sanjivani Parenterals and SRS.

    ReplyDelete
  9. Hi VP... There is a panic situation in NCL... I request you to please guide us on the stock and let us know if it is a sell or hold ?

    ReplyDelete
    Replies
    1. Opinion about NCL result already shared below the previous posting. After result , in an interview to media , M.D of the company projected a profit of Rs.50 Cr in this full year which is below market expectation .This may be the real reason for fall in stock price.

      Delete
  10. Sir what are your views on Kellton Tech (VM Soft)?

    ReplyDelete
  11. Skm egg products :After continuous rise in egg prices, now it has shown a trend reversal.Hopefully it falls further :)

    ReplyDelete
    Replies
    1. Yes, it happened after two and a half months upward journey , let us hope for the best.

      Delete
  12. Do you like EPC results with profit of 3.6 Cr and sales of 50 crores?

    ReplyDelete
    Replies
    1. Waiting to see the continuity of the same :)

      Delete
  13. kpthakershy, now in hindsight I can say that it was a well planned Bobby Trap. See the sequence of events :-
    1. Very good first half results and strong Turn Around Story circulated.
    2. Repeatedly promised that the 2nd Half Results will be even better.
    3. Popular experts come on the TV Channels and promote NCL.
    4. Just on the day of the Results, News is inserted in leading Financial News Paper that this great turnaround Co. is available at a very attractive valuation.
    5. Big expansions are announced.
    6. Board Division & Energy Divisions are highlighted.
    Not to speak of ordinary lay investors, even seasoned and experienced investors will fall into the trap.
    7. Believe me, after seeing the News Item, I have added NCL shares till Rs.149/-, without doubting the intentions of the concerned parties.
    Now, please also see the other side of the story :-
    1. Promoters have been reducing their holding and selling their shares at the highest prices. Even on the day of the Results, big lots of NCL shares have been sold by the informed parties.
    2. Now, the management has taken a `U` turn and is openly talking about the bad results in the 2nd Half.
    3. Even the announcement of a small 10% Dividend may have been made to lure ordinary shareholders to buy more shares and also to sell their NCD of 325 Crores. When so much debt is being raised and expansion is around the corner, what was the need to declare any Dividend and not save that money ? This was also a trap.
    4. The added production from the new Capex will take minimum TWO Years, if there is no delay in execution.
    5. The Interest on the NCD will start from the day one, putting more pressure on the already crumbling Balance Sheet.
    6. Even the existing Plant is not run to the full capacity.
    7. The Energy Division has got a very negligible contribution on the total Sales.
    8. Now, the Management had lost the faith of the investing community and the share price may take years to reach the recent High made by it.
    9. But, who knows, after all this negativity, the inner circle may start buying NCL shares at low levels, and once again the management comes out with all the rosy promises, and better Results.
    10. Seeing the DEBT BURDEN and the insider game in NCL shares, it is BEST to STAY AWAY from NCL. There is no dearth of other very Good investment opportunities.
    I know, many may not agree with me, but Sir, this is what I genuinely feel. Regards

    Disc: copied from mmb
    Dear VP Sir, waiting for your view about above comment

    ReplyDelete
    Replies
    1. Go through the three recent interviews of MD below :

      1)http://www.moneycontrol.com/news/business/increasedemand-to-lead-growthfy16-second-half-ncl_2750241.html

      2)http://www.moneycontrol.com/news/business/cement-demandtn-to-gofor-rehabilitation-ncl_4519901.html

      3) http://www.moneycontrol.com/news/resultsboardroom/chennai-floods-impacted-q3-earnings-ncl-ind_5233061.html


      The confidence level of MD in last one is different from the first two ,which is a fact and it may be the reason for recent correction in stock price. Now he is projecting a bottom line of Rs.50 Cr in full year which translate into an EPS of Rs.13.50 . Though the same is below based on his earlier arguments, stock price already corrected and it is trading @ less than 10 P/E ,so the lower level risk may be capped .In the case of interest burden on account of new loans - I don't think the entire amount will be utilized for new plant but a major portion may utilize for replacing current high interest loans .Anyway , the change of word by MD within short span is really surprising .We initially discussed this stock around Rs.70-80 level and I don't expect that level any time soon if company can manage to report at least Rs.50 Cr profit in full year as he indicated in his recent interview.

      Delete
  14. POSITIVES
    1 Pledged shares reduced from 34% to 17%
    2 More Capital is being employed in prefabs, boards and RMC divisions which are more profitable.
    3 Turnaround expected in Prefab division
    4 OPM better YoY basis.
    5 Retracements in the share price (btw 60-80) during sharp corrections would present excellent entry points for the long term. In absence of major capacity expansion, low price realization could hit 2016 performance also. But cost cuts are expected to stabilise quarterly performances. 2017 should look up, so one should accumulate in staggered manner.

    ReplyDelete
  15. Want your views on zensar technologies sir..kindly advise!!

    ReplyDelete
  16. Dear VP,

    There is a lot of confusion regarding the Pantaloons after its merger into ADITYA BIRLA FASHIONS(ABFRL) and there seems to be a sudden decrease in its price closer to 14%, Could you please help us understand why there is a sharp decrease in price.

    Thank you.

    ReplyDelete
    Replies
    1. Share holders of AB Nuvo now received the shares of Aditya Birla Fashion on de-merger of fashion business from Aditya Birla Nuvo and merger of the same with ABFL.As a matter of policy many institutions prefer to exit from shares they received on such scheme of arrangements whatever be the prospects of the de-merged portion . I believe , it is part of such an exit by any institution and hope stock will recover once these shares absorbed in the market.

      Delete
    2. More floating shares will be the reason for a price correction. Going forward, it has a bright future. Every correction is a an opportunity to add

      Delete
  17. Hi VP sir,
    What is your opinion on il&fs engg. Why it is stuck near 58.

    ReplyDelete
    Replies
    1. My opinion already shared as a comment below the last posting on IL&FS Engg .ie, on the next day of September quarter result declaration date.

      Delete
  18. Sir, hoping my query gets answered this time.
    Your view on the recent downfall of suzlon share prices?
    Any major change in fundamentals?

    ReplyDelete
    Replies
    1. Less than expected order book and government taking more steps to promote Solar compared with wind in the non conventional energy space may be the reasons .

      Delete
  19. Sir
    What happened in SKM. non stop fall.Have you identified any problem or just a correction

    ReplyDelete
    Replies
    1. As I mentioned previously , price of raw material was high till recently and short term players may opt for an exit on anticipation of some impact in near quarter result. But now ,fortunately Egg price falling in the same pace as it moved up and it came down by 10 % in last one week alone. Let us watch the trend and hope for the best.

      Delete
  20. Sir, your views on KPIT tech?
    Thanks...

    ReplyDelete
  21. Hi VP Sir, Enkei wheels has announced good results. What are your views on result update Sir.

    ReplyDelete
  22. Sir

    According to Motilal oswal research report ABFRL 2016E eps 1.9 2017E eps 3.4 2018E eps 6.5 and at Rs 220 stock is trading at 33X2018E

    In that case do you feel stock is currently over valued

    ReplyDelete
    Replies
    1. Many of these estimates are based on interest payment for current debt of consolidated entity . But on merger this company will turn cash flow positive and I expect part repayment of debt before FY 2018 . Company's with good brands always trade at premium valuation.

      Delete
  23. Hello vp sir

    Sir please share you views on following stocks...

    1. Indian Card
    2. Chartered logistics
    3. Bodal chemicals

    Sir pls reply this time...

    ReplyDelete
  24. Hello VP sir...
    Good evening...
    Pls look @cosmo films ltd ... Trading @265 to 270 .... And EPs is 50+ ... Is it a value buy at current levels... Even 6fold profits in past quarter... Sir pls have a look
    Thanks
    Anand reddy

    ReplyDelete
    Replies
    1. It is in a cyclical industry and this may be the reason for lower discounting.

      Delete
  25. Sir I have position in dynacos tech. At Rs.6. 3000 quantities. .... wat should i do?

    ReplyDelete
  26. Can we buy Sarda Energy for long term investment

    ReplyDelete
    Replies
    1. Comparatively good one from the Steel sector.

      Delete
  27. Dear VP Sir,
    Your your views on Arrow Coated Products currently trading at 590, company has declared 3/- dividend in this quarter.

    ReplyDelete
    Replies
    1. Stock suggested below Rs.15 , and neutral at CMP

      Delete
  28. Dear V. P.
    This quarter we have not seen your updates on your recommended stocks (after results) except SKM. Your views are important for us as it will guide us to take a decision further on the stocks. Kindly update. Also, sir, any new company catch your eyes during this result season which we can consider for buy. Plz reply.

    ReplyDelete
    Replies
    1. As you are aware currently there is some limitations to explicitly express opinion in a public forum . If I could not express my opinion clearly ,my readers may interpret the same as they like and there is a possibility to take a decision just opposite what I meant .This is the reason to avoid more postings in these days.

      Delete
  29. Sir your view on meghmani organics plss ??

    ReplyDelete
  30. Dear sir, are we now in a bear market? Do we hold our small cap portfolio, come hell or high tide?? Yes I think, but can we buy recently beaten stocks like Abfrl at these levels? Or wait. Please guide

    ReplyDelete
    Replies
    1. As in the case of farming , there is a time to sow and another time to reap in stock market too.To a great extent performance of companies closely linked with the overall health of economy . Though the data giving decent growth , the ground reality is entirely different and almost all industries are facing lot of challenges in these days . Based on this situation , I am not expecting a return in this year from stock market compared with last 18 months. But these type situations are suitable to sow to reap later, provided there is possibility to test our patience .

      About beaten down stock, it is difficult to generalize. Decision should be based on the reason of fall . If it is due to general fall in market and underlying businesses is strong nothing wrong in buying but if we feel a particular company's balance sheet is not strong enough to weather the storm if the situation last long , just avoid such companies for the time being and watch the situation of the industry and take a call based on the signs of revival in that industry .

      Delete
  31. hi Sir,
    Do you think we need to give more time to Godavari drugs.

    ReplyDelete
  32. Sir please give your view on the latest result of
    - Berger Paint
    - Samkrg Piston and Ring

    Thanks

    ReplyDelete
    Replies
    1. Both results were satisfactory in the present business environment.

      Delete
  33. Sir, it appears you have turned pessimistic on overall outlook for the market, thanks

    ReplyDelete
    Replies
    1. Pessimistic about the market in short term but not about the opportunities available. The issue is, majority of small cap investors expecting similar kind of return of last year which may not come this time .

      Delete
  34. Thank you VP ji for always staying and guiding us. Pls share your views on shalimar paints

    ReplyDelete
  35. Sir, please share your view on valiant communication result.
    holding it @112.can I average it at current price?

    ReplyDelete
    Replies
    1. No meaning in analyzing the result of companies on a quarterly basis whose business is tender based.

      Delete
  36. Sir u r views on Jubilant Life science results?

    ReplyDelete
  37. Sir please share your views on the results of Satin Creditcare Network Ltd.

    ReplyDelete
    Replies
    1. Result was satisfactory .We discussed it around Rs.80 when it first listed in NSE .No new suggestion @ CMP Rs.350

      Delete
  38. Dear VP,
    I'm still holding Capital first from your recommendation. (from 230).Current price is 400 Please comment on Q3 results. Can we still hold this for long term ?

    Thank You :)

    ReplyDelete
    Replies
    1. Result was decent and one can hold it , but not expecting same pace of growth in near future.

      Delete
  39. Adlabs or pvr which one you like at current price sir?

    ReplyDelete
    Replies
    1. Adlab is in Amusement park industry and PVR is in Film Exhibition , how we can compare both .

      If we consider the whole indutry under 'Entertainment' , I prefer Wonderla.

      Delete
  40. Just for Curiosity I am asking.. most of the share market Bloggers and advisers will stop advising to buy when the market is in free fall.. even they stop commenting also for any thing.. if the market is going up then they will start advice.. I am not pointing you sir.. just as a general question that every listeners will think I am asking...

    ReplyDelete
    Replies
    1. I don't the case of others .If you need an explanation in my case , I started this blog when the stock market was in a bad shape and reduced the posting when I could not find anything available at a reasonable valuation in small cap space.( Off course, regulatory restriction was also a reason)

      Delete
  41. Sir, your views on result of v2retail and godavri drugs' result?

    ReplyDelete
    Replies
    1. Result of Godavari Drugs was disappointing .

      Delete
  42. Dear VP,

    Have you had a chance to look into the Subex result. Profit is shown as 6 fold jump but interest was -36. Is it positive or negative.
    Thanks,

    ReplyDelete
    Replies
    1. Part of profit was due to interest write back .Even after excluding the same, result was good . But lot of supply still in the market due to selling of FCCB converted shares in recent times.

      Delete
  43. Dear VP Sir,
    There are couple of member in MMB, having thousands of followers given 80 - 100 stocks as multibaggers. one fellow gave 43 stocks, other lady gave plenty as multibaggers.
    Most of them seem to have, No Fundas, & no explanation was given. But thousands of retail small investors invested blindly. Don't what happens.
    It would be good if you can share your opinion at high level in this blog about those stocks, being diplomatically correct, by not offending anyone.
    This helps many to save their hard earnings.

    Thanks
    Srini

    ReplyDelete
    Replies
    1. Rationale for each and every person on different stocks may be different .Own study and conviction is most important in case of Investing in stocks.

      Delete
  44. Dear VP Sir, I am invested in MMFL for more than a year and half. I see these days all forging companies are beaten up (I am not taking about the panic free fall which is happening in the last one week). Any specific reason for this sector. Any expectations on the MMFL in the coming future. Requesting for your views on the same.

    ReplyDelete
    Replies
    1. Not all forging companies only , everything is falling.

      Delete
  45. sir alps industries stops the production of its 1 plant at haridwar....r u still think for turnaround in this company ....holding since after seeing ur intersting comment on mmb...thanks and god bless u...

    ReplyDelete
    Replies
    1. National Green Tribunal order against Alps in case of Pollution related matter is Unfortunate ,which may impact negatively

      Delete
  46. There was a mistake in previous comment on Mindteck,improvement in consolidated bottom line was due to a tax write back.

    Please note the same.

    ReplyDelete
  47. Congrats VP sir for timely pointing out the mistake. I am confused after seeing the results and your comment on mindteck

    ReplyDelete
  48. Sir: Can I enter Godavari drugs at current levels for long term

    ReplyDelete
  49. Sir what is ur view on viseshinfo, nutek India, scan point geomatic ...

    ReplyDelete
  50. Hi VP,

    My question is the sugar cycle. There has been a recent run up in prices and the production estimates this year are also low. Is this the right time to enter the cycle?

    ReplyDelete

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