You might want to do some Google searches on Sector Cycles and Sector rotation. This was never taught to me in my college economic courses when it is very important for investing. We all know about the real estate cycle but many other sectors also have their own economic (life) cycles too.
The value investor will find under valued assets at/near the lows of the economic cycle which each individual sector tends to follow. The hard part is how deep and long is the cycle low, what is the catalyst for the cycle to turn higher, is it part of a larger (economic) sector rotation and many other factors that may/can cause long up/down cycles. Interest rates and the Federal Reserve can impact the economic cycle.
At sector lows, Price/BV are close or less to 1.0, PE's are usually <10 or maybe no earnings just loses, large amounts of debt impact profitability (ie too much leverage), cycle low may/could be due to low commodity prices (Buffet never liked to own companies where revenues were impacted by commodity prices), FCF declining and basically, the company is spinning downward due to supply/demand imbalance.
If you can time your value Buys at the start of the up-cycle (from some long cycle bottom) and pick the strongest companies in that sector, there are some great gains to be had. The home builders (ie real estate) has always been subject to economic cycles but I never could really figure out what/when to Buy them. Auto makers, steel industry, copper miners, durable goods are just a few that are impacted by sector cycles.
When I do my GN screens, many stocks come up as undervalued simply because the sector is at/near year low. EPS are falling and analysts have cut their earnings estimates. Currently many retail companies are in this position. This may not be due to sector/cycle low but from some new disruptive business/technology (or a combination of both).
You might look at CAT, DE and other heavy machinery industrial. These are considered very cyclical companies. See what/how analysts categorize them over the 90's, 2000's and now. My observation is with every deflation down cycle/sector, big opportunities present themselves but when/what to Buy becomes the challenge. If in doubt, buy a basket of these companies.
Good Investing
EKS |
