Investing in cyclicals
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April 20, 1999: 5:08 p.m. ET
Cyclical stocks difficult to predict, but some analysts say gains still ahead
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NEW YORK (CNNfn) - The tug-of-war between growth and cyclical stocks on Wall Street in recent days may have left many investors wondering where to run.
The relationship between growth and cyclical issues is a complex one, with the direction of cyclical stocks especially hard to predict.
Anatomy of a cyclical stock
Cyclical stocks are directly influenced by the global economy. Strong economic fundamentals generally yield high growth in these stocks.
Underlying this phenomenon is simple supply and demand. When the economy is booming, for example, many more goods are shipped, bolstering the bottom lines of paper companies who manufacture boxes and chemical firms that supply plastic for transport containers.
Indeed, paper and plastic sectors have been among the big winners in recent days, with companies like DuPont (DD) and Hercules (HPC) seeing double-digit percentage gains. Metals also have gotten a boost, as manufacturers such as Reynolds (RLM) and Alcoa (AA) climbed amid hints of a stronger global economy.
Growth stocks retreat
Unlike cyclical issues, growth stocks tend to have very predictable earnings momentum. As a result, they tend to perform well regardless of the state of the global economy.
These stocks have been strong performers in the past four years, as repeated concerns over emerging markets dominated Wall Street. In recent days, however, growth stocks have fallen out of favor, as renewed optimism about the global economy prompted investors to shift capital to cyclicals.
That move is long overdue, according to some analysts.
"Since the Asian crisis and the Russian crisis and then the Latin American problems, you've had a market that has enormously discounted cyclicals as if they would never see a recovery," said David Katz, the chief investment officer for Matrix Asset Advisors.
Tricky investing
Because the relationship between growth stocks and cyclicals is generally an inverse one, there are ways for investors to cash in on the shift.
Unfortunately, economic cycles are difficult to predict, making investment bonanzas hard to pinpoint.
In fact, recent market upheaval reaffirms "how quickly and dramatically things can change," said Katz.
Generally-speaking, says Tony Dwyer, chief market strategist at Ladenburg Thalmann, "growth stocks should be bought on weakness. Investors should wait for a pullback."
Right now, Dwyer said, growth stocks have gone too far too fast.
"But that's not to say growth stocks are a sell either," added Dwyer. "They always grow and ultimately, you are going to make money in any environment."
Dwyer believes the current rotation away from the technology sector into cyclicals will last through the end of the year.
Catching the tip of the wave
Whereas growth stocks are usually considered a solid long-term investment, cyclicals tend to yield gains in the short term only. The key to successful cyclical investing is to predict economic cycles, which many analysts agree is rather "difficult."
Cyclicals are generally "a less attractive place to be most of the time, but (they) are so depressed right now that there is money to be made," said Katz.
That sentiment clashes with traditional dogma, that cyclicals are best bought in the middle of a recession, prior to the economy hitting another growth spurt.
Economic indicators and commodity prices can yield clues to where cyclicals are headed.
"When you start to see a turn in (commodity) prices, as we have in the past couple of months, cyclicals could be on their way up," said Dwyer.
-- by staff writer Nicole Jacoby
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