The Ups And Downs Of Investing In Cyclical Stock Market
MONEY Morning News - Monday 19.8.2013
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 time it takes to go up and down, known as a business cycle, can last years. The way to Building Wealth over many years is to nimble bit by bit to spread out your average costs and risks in valued stock portfolios. Over a period of time you would have planted many valued MONEY TREES in several type of businesses of reputable listed companies with a lot of assets at much average lower prices. As you noticed that the above the Bursa Malaysia, (KLSE) stock market will always the swing of HI (Bull) and LO (Bear) periods over past 27 years history from 1978 to Sept 2005 , this is due to many reasons stated below:-
1.) the Bullish market started in 1978 soared from 200 points double up to 400 points in 1987 after 9 years ; (Bullish)
2.) the FBM KLSE suffered a min crashed in Dec 1987 by -58 points.; (Bearish)
3.) the FMB KLSE rebounded sharply in 1986 to 1990 with an increased of +183 points to hit 600 points.; (Bullish)
4.) the Gulf war in end 1990 saw the stock market panic resulted in sold down and FMB KLCI felt below 500 points; (Bearish)
5.) the super Bulls ran from 1991 to 1996 saw the FMB KLCI hitting the highest 1,200 points.; (Bullish)
6.) the Asian Financial crisis in 1997 to capital control in 1998 saw FBM KLCI plunged to 300 points; (Bear)
7.) the Global technology rally in 1999/2000 where FBM KLCI rebounded to 1,000 points; (Bull)
8.) the correction of Technology bubble in 2000 , the Asian SARs crisis in 2003 and Iraq War dragged down to 600points; (Bear)
9.) the FBM KLCI rebounded strongly since 2004 onwards to hit the 900 points level; (Bullish)
10.) The stock market remained bullish even though the Tsunami and Earth quake incurred in several parts of the world in 2005 and closed at 1,000 points. (Bullish)
Based on the historical stock market trend saw the FBM KLCI rallied many times in 27 years from 1978 to 2005 onwards, as a result we also noticed that what types of stocks were badly hit and the strength of blue chip stocks were able to defend their stocks prices strongly for decades as compared with the cyclical stocks and speculative stocks were delisted and still under recovery from their hefty losses. Let us study the impact of Cyclical Stocks played a speculative activities in the stock market.
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. (For more on the business cycle, see Recession: What Does It Mean To Investors? )
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 trading 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. (For more on how to research insider activity, see Keeping An Eye On The Activities Of Insiders And Institutions. )
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.
Remember to hold the valued stocks with fundamental strong in their financial reports, good management teams, forever growing businesses, consumer demand needs and wants as well as pay-out consistent dividend policies for long term strategy.
(Source : Investopedia)