{"id":22826,"date":"2013-07-12T00:00:00","date_gmt":"2013-07-11T18:30:00","guid":{"rendered":"https:\/\/www.moneyworks4me.com\/investmentshastra\/peter-lynch-approach-of-investing-in-cyclical-stocks\/"},"modified":"2013-07-12T00:00:00","modified_gmt":"2013-07-11T18:30:00","slug":"peter-lynch-approach-of-investing-in-cyclical-stocks","status":"publish","type":"post","link":"https:\/\/www.moneyworks4me.com\/investmentshastra\/peter-lynch-approach-of-investing-in-cyclical-stocks\/","title":{"rendered":"Peter Lynch Style: Mastering the Cyclicals!"},"content":{"rendered":"

Have you ever been on a roller coaster ride in an amusement park? Travelling on these rides is so terrifying sometimes: at one moment you are up and upside down, and the next, you\u2019re flying downwards so fast that you can hear your every heartbeat! If you have not been there, then don\u2019t worry, we will take you through the roller coasters of stock markets: Cyclicals<\/strong>, in which there is no end to ups and downs.<\/p>\n

What are Cyclicals?<\/h3>\n

\u2018Cyclicals\u2019, according to <\/a>Peter Lynch<\/u><\/span><\/a> are the companies whose revenues and profits are in tandem with the state of the economy with their performance being tied to the business cycle.<\/p>\n

They can be classified under two categories<\/strong>:<\/p>\n

Rate sensitive sectors<\/strong> – These are the businesses which are primarily affected by the interest rates prevailing in the economy and thus any contraction or expansion in economy consequently affects them. Auto companies<\/u><\/span>, banks and capital goods fall under this category.<\/p>\n

Commodity based sectors<\/strong> – Earnings and cash flow of these businesses are dependent on the demand \u2013supply of their products\/raw materials leading to the final price of the product. During expansion, there is increase in demand, resulting in business expansion; whereas in the times of recession, the demand gets subdued, leading to business contraction. Metals & Mining, sugar and cement companies follow these patterns.<\/p>\n

Cyclicals, thus, suffer huge losses during recessions, often finding it hard to survive till the next boom. But, when things do start to change for the better, dramatic swings from losses to profits can often surpass expectations. It is to be noted that rise and fall in profit of cyclicals usually depends on various regulative and administrative policies.<\/p>\n

Why invest in a cyclical company?<\/h3>\n
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\u201cIt takes remarkable patience to hold on to a stock in a company that excites you, but which everybody else seems to ignore.\u201d<\/strong> \u2013 <\/a>Warren Buffett<\/u><\/span><\/a><\/p>\n<\/blockquote>\n

Investing in cyclicals is akin to travelling on a sine wave. One needs to invest in stocks at the trough and get out of investment at the peak of sine wave. Each cycle has a downside, during which prices dip and an upside, during which prices rise to their highest. The depth of the trough and the height of the peak, the duration of downside and the duration of upside may vary for different cycles, but the overall downside, peak and upside are more or less same for most cycles. This downside and upside pattern repeats itself many times for a majority of the cyclical stocks. One has to take advantage of this repetition and buy on the \u2018upside\u2019. The approach is quite simple; however, successful cyclical investing requires careful timing.<\/p>\n

How to invest in Cyclical?<\/h3>\n

Before selecting a cyclical stock, it makes sense to pick an industry that is due for a revival. Declining interest rates and growing consumer spending signals towards the economic expansion. Then, in that industry, choose companies that look especially attractive.<\/p>\n

Consider an example: In the present economic scenario, where economy is growing at a mere 5% growth, automobile industry is facing a slump in their sales due to higher interest rates and lesser demand. Lower interest rates provide better financing, and thus, stimulate consumer demand. So, one can look for the signals affecting the industry and invest in a company which is able to perform better than its peers.<\/p>\n

Following points should be considered while investing in Cyclicals:<\/strong><\/p>\n