What goes down must come up.
That's the theory behind investing in cyclical stocks, which have recently caught the fancy of Wall Street in a big way.
Behind the positive thoughts are rising earnings, a weak U.S. dollar that encourages exports, restructured operations that boast greater efficiency, loads of available cash, and the Kirk Kerkorian bid for Chrysler Corp. that opened the door to other potential bids for undervalued cyclical firms.
"Cyclical companies are buying back stock, they're buying smaller companies for cash, and foreign companies are buying U.S. companies lock, stock and barrel," said Charles Clough Jr., portfolio strategist at Merrill Lynch & Co., explaining why the area has become so hot.
Individual investors are going to become much more interested, he added, especially if there's "a little market correction to pull them in."
As their name implies, cyclical stocks tend to rise and fall with the ups and downs of the economic cycle. Investment in these basic industries, such as automobiles, steel, aluminum, paper and airlines, requires discipline and market timing.
Ideally, you buy cyclical stocks when you see initial signs of the economy emerging from difficult times and sell when you see trouble on the horizon. But that's easier said than done, and many investors have lost bundles of money playing the economic cycles incorrectly.
Strategists now believe it's time to buy, not because the economy will be booming, but because it should be pleasantly predictable. In addition, a decade of cost-cutting and streamlining has transformed many cyclicals into growth vehicles less vulnerable to the economic cycles.
Besides the financial attractiveness making these stocks worth considering, takeover potential is a factor in some cases.
"A long-lasting expansion in the U.S. will benefit earnings, and growth in business outside the U.S. will be aided by the lower dollar," said Steven Einhorn, portfolio strategist with Goldman Sachs, who expects the stock market to benefit from a sustained, moderate economy over the next 18 months. "Furthermore, these are the companies most prominent in raising productivity."
Of course, not all cyclicals are alike. Just ask Marshall Acuff Jr., portfolio strategist at Smith Barney Inc., whose report earlier this year about "cash machine" companies spotlighted Chrysler in particular. Some have blamed him for drawing attention to the undervalued status of the No. 3 U.S. car maker that made it a target.
