Many times investors hear about cyclical stocks and for newcomers it might be confusing as to which stocks they should look for and when. Industry professionals and experienced investors who have gone through several business cycles will have a better grasp of it, yet it really isn’t too difficult.
You just need to understand the basics of how an economy grows and when certain products and services are needed. Sometimes it may be high commodity prices that drive industries and other times it may be whether the interest rates are low and stable or high and discouraging.
The next areas expected to grow the economy are consumer and services industries, which have to take up the extra work after the mining pullback. The government is keeping interest rates low to facilitate this, so investors should position themselves for it.
The rising housing market is making basic building materials companies rise in share price, so the next phases to be ready for are the basic materials for general businesses. Two such types are paper and packaging as well as industrial chemicals.
Amcor Limited (ASX: AMC), the global packaging company makes products related to food, healthcare, personal items and beverages. With a more vibrant consumer driven economy, each of these areas will probably sell more to clients.
2013 saw higher revenue and underlying net has risen each year since 2007.
Orora Ltd (ASX: ORA) is a spin-off company from Amcor that manufactures fibre and beverage packaging in Australia and a packaging distribution business in North America.
It achieved a 24% increase in underlying pro-forma earnings in the first half. Its North America business saw a strong result in the same period.
For industrial chemicals, we can look towards companies such as Orica Ltd (ASX: ORI) and Incitec Pivot Limited (ASX: IPL). Both are connected with the mining industry for commercial explosives, but as that revenue source has declined recently, their share prices have trended down since early 2013.
They are adjusting their businesses more towards industrial chemicals for manufacturing and agricultural use like fertilisers, as well as expanding their overseas business. Before the industrial business cycle rises too far, investors may be able to pick up the stocks at relatively good prices now.
With cyclical stocks, you should look back in the past to see when their industries rose and what the circumstances were.
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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.
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