Think of the economic cycle as a wheel...
.jpg)
This image roughly captures the whole cycle, highlighting the
various stages of economic growth and contraction. Right now, we're
just past "9 o'clock" on the wheel, ascommodity prices have been
steadily rising (although with some recent profit-taking). We're
surely done with the "8 o'clock" phase, where we saw stocks post a
remarkable two-year rally after a sudden plunge. If the current
cycle plays out as it has in the past, then more stock gains lie
ahead, but perhaps in a more limited fashion than some realize. We
may be looking at an extended period of economic expansion in
coming years, but stocks prices always look ahead and have already
anticipated some of that expansion. [For more on howsector rotation
can lead you to the right stocks toprofit ,
go here
.]
Theeconomy has started to sputter back to life, as seen by rising
employment figures and positive quarterlygross domestic product (
GDP
) reports. We're just about at "9 o'clock," or "general recovery."
When monthly employment trends really start to pick up later this
year, we'll move up to "10 o'clock" -- "a strong recovery." Again,
some of the recent market rebound anticipates the move into this
phase, so by the time we actually enter into the strong recovery
phase of theeconomy , investors will start focusing in "11 o
'clock." And though it may seem premature, we're already looking at
the latter stages of abull market , known as "late-cycle plays."
Increasingly, you need exposure to late-cycle plays to stay one
step ahead of the market. The challenge for investors is to have
faith that these late-cycle plays will move into vogue, even as
they are being shunned right now.
So what are late-cycle plays? Think about anything that only
receives real interest once consumers are really confident and
broader economic growth is on sound footing. We most recently saw
such a phase from 2005 to 2007, when homes were selling in high
numbers, car sales hit new peaks and small businesses were
confident to heavily invest in growth initiatives. It takes a leap
of faith to imagine we'll get there, and it could be a good 18-24
months before the animal spirits are truly in evidence. But the
stocks that benefit from such an environment, the "late-cycle
plays," will surely rise well in advance, if history is any guide.
There are three late-cycle groups I have in focus...
1. Consumer-focused stocks
are a clear beneficiary. At some point, perhaps in 2012, retail
sales are likely to steadily build higher as rising employment
levels lead to heavier consumer spending. And
as I noted
last year, retailers are in such strong shape that simply moderate
sales growth could trigger faster
profit
growth.
My favorite retailers right now include:
-
Aeropostale (NYSE:
ARO
)
, which is very inexpensively valued, is buying back lots of
stock and is always just a few quarters away from the next hot
trend.
-
Radio Shack (NYSE:
RSH
)
, which is currently in transition as new management comes in,
but still possesses robustcash flow characteristics. [Read more
of
my analysis here
]
-
Kohl's (NYSE:
KSS
)
, which makes the right moves year after year and is blessed with
very reasonable valuations. [Read more
here
]
2.
I also think you need to keep watching the
home-building stocks
. Conditions remain tough, and any real upturn is at least a year
or two away. But investors will rotate back into this sector long
before it is fully healthy. [I noted three home builders that look
poised for a good recovery
in this article
.]
3.
Lastly, the major
bank stocks
are likely to fare very well in this phase of the economic cycle,
benefiting from higher lending activity and expanded profit spreads
on their loans. That's why Warren Buffett loaded up on
Wells Fargo (NYSE:
WC
)
in recent months -- he's got a multi-year view on how the bank will
fare in an improving
economy
.
Action to Take -->
If there is a downside to this investing theme, it's that the stock
market will likely have peaked once these un-loved sectors move
back into vogue. Even if the economy ends up booming a few years
from now, rising interest rates and fears of eventual fatigue in
the economic expansion will cause many institutional investors to
rotate away from stocks and into safe plays such as fixed income.
But for now, get ready to gear up these late-cycle plays.
-- David Sterman
P.S. -- I don't know if you're aware of this or not, but a
20-year energy agreement between the United States and Russia is
about to expire. The problem is, this deal supplies 10% of
America's electricity. When the Russians refuse to renew the
agreement, the U.S. will face an entirely new kind of energy
crisis. This disruption could send a handful of energy stocks
through the roof. Keep reading…
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.