Is Now the Time to Buy Cyclical Stocks?

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In his book – “The Most Important Thing”, Howard Mark shares some of his experiences from his decades of investing.

One of his key ideas, namely, “The most important thing is to understand cycles”, focusses on cyclical stocks.

So, what are cyclical stocks?

Cyclical stocks are companies with businesses that fluctuate as a result of the changes in the economic and business environment. For example, an oil and gas company such as Keppel Corporation Limited (SGX: BN4) and a farmer such as First Resources Ltd (SGX: EB5) could be considered cyclical stocks.

On the other hand, Raffles Medical Group Ltd (SGX: R01) is non-cyclical, since people can fall ill at any time rather than in cycles.

So, why should we consider cyclical stocks?

That is a good question. To invest successfully, we should always consider buying stocks when prices are low. However, it is difficult to buy companies at low prices, especially now when interest rates are low.

But cyclical stocks can provide investors with opportunities to find profitable ideas. This is especially true since most investors tend to overreact during cyclical downturns. This could leave cyclical stocks unloved.

As rational investors, we could take advantage of irrational market behaviour.

But there are risks. One of the main dangers of investing in cyclical stocks is to buy when the company is at the peak of its business cycle. To mitigate this risk, we could look at some key numbers.

Here are a few to consider:

  1. A significant rise in capital investments, production capacity, debt, and earnings compared to “normal” years.
  2. An increase in merger and acquisition activities within the industry.
  3. Low price to earnings ratio.

Cyclical stocks could provide a good area for investors to look for interesting investments. But consider also some of the following:

  1. Invest in companies that produce essential products and services
  2. Focus on industry leaders
  3. Avoid companies with significant debt

But most of all, be patient because the investments could take some time to pan out

Presently, industries such as the oil and gas sector, shipping, and palm oil could be interesting places to look.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.