Although the U.S.
has recently been on an unpredictable path, get ready to see more
typical economic patterns take root. The economy is just get its
footing now and should be a bit better in 2013. And, if history is
any guide, it will have practically recovered by the middle of this
To be sure, a lot of companies are still speaking of challenging
industry conditions, but remember that "investors always look
ahead." So they will soon start buying up companies that tend to
really benefit when the economic cycle is in a clear upward phase.
Smart investors will want to begin looking at these stocks now.
Tricky to value
At first blush, these cyclical stocks may not seem especially cheap
relative to the rest of the
. They have to sport medium to large price-to-earnings (P/E) ratios
on near-term results, but need to be valued against what they might
earn when the economy is on strong footing, known as "peak-cycle
profits." These stocks rarely trade for more than 10 times
, so several bargains abound when using this yardstick.
as an example. This maker of cranes and other construction
equipment saw sales and profits start to rise early in the last
decade, hitting the peak of the cycle in late 2007 and early
At the end of 2003, this stock looked expensive, trading for more
than 90 times profits. At the end of 2004, the P/E ratio was a
still-high 25 -- based on trailing earnings -- but 3.5 times what
the company would generate by 2007. The fact that the stock ran to
$45 by November 2007 (before a year-end pullback to $36.67) was a
clear case of too much investor enthusiasm.
This stock is now below $14, and by using the rule of thumb of a
peak-cycle P/E ratio of 10, it could move up to $25 or $30 in the
next few years. "There is still substantial upside to a 2014E
mid-cycle value of $23 in a continued U.S. nonresidential
recovery," Goldman Sachs analysts note. They say we won't see the
peak of the cycle until a year or two after that, so
will likely move past that
once analysts actually start speaking of peak-cycle results.
Joy Global (NYSE:
is another deeply
that could rise steadily higher as the economy strengthens. Shares
of this mining equipment firm have fallen nearly 20% since late
January to a recent $79, but could power into the triple-digits in
the next 12-18 months.
Investors have been concerned that a drop in demand for coal would
negatively affect sales for this company's coal-mining equipment.
But they may be overlooking the fact that a steady spate of
acquisitions has pushed Joy Global's exposure to the coal-mining
industry to less than 25%. Analysts see Joy Global's earnings
rising from $6 per share in fiscal (October) 2011 to roughly $8.50
per share by fiscal 2013. If history is any guide, then this figure
could hit $11 or $12 by the middle of the decade, and shares will
eventually be valued at around 10 times that peak-cycle number.
Analogies to the past cycle don't necessarily apply here. In recent
years, Joy Global has made a series of acquisitions that should
push sales and
earnings per share (
well above the previous cycle peak. For example, the company is
expected to generate $6.4 billion in sales by fiscal 2013, and
perhaps $8 billion by the middle of the decade. This is well above
the $3 billion in average annual sales seen in fiscal 2005 through
Of course, my favorite deeply-cyclical stock is
, which is affected by unit volumes and unit pricing.
In the last cycle, in 2007, sales peaked at around $29 billion,
hit $3.24. Sales have now fallen below $25 billion, and it's the $4
billion difference in revenue that really explains the
swing, as Alcoa had been selling aluminum at far above cost back in
2007. These days, Alcoa's EPS is stuck in the $0.50 to $0.75 range.
I added this stock to my
$100,000 Real-Money Portfolio
, not because I expect to see Alcoa earn $3 a share any time soon.
But I fully expect EPS to approach $2 by 2014, thanks to industry
supply cuts that will eventually boost pricing. This stock could
head to $20, or 10 times my peak-cycle forecast and roughly double
where the stock sits now. The fact that this stock touched $40 in
early 2008 tells you how enamored investors can become of
deep-cycle stocks once they are hitting their stride.
Risks to Consider:
These companies won't truly hit their stride until Europe has
exited its current
. This may not happen before 2013 or 2014.
Action to Take -->
These are just a few examples of deep-cycle plays. Other stocks to
. None of these stocks looks like a bargain in the context of
likely 2012 results, but all could move up sharply as investors
grow more confident that the economy is building a head of steam as
we move toward the middle of the decade.
You can also follow along with my
$100,000 Real-Money Portfolio
trades free for a limited time.
Simply click on this link to sign up
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of AA in one or more if its "real money" portfolios.
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