What do a hearing device maker and a big iron ore miner have in common?
They both have cycles of business that an investor can use to their advantage. Rather than chasing high prices when Rio Tinto Limited (ASX: RIO) and Cochlear Limited (ASX: COH) are popular, you can get a bigger bang for your long-term buck when the outlook seems gloomy.
The ongoing woes of the iron ore market seem set to continue, yet Rio Tinto hasn't fallen that much in price recently. Looking past the regular price rises that can occur before the August results season, the stock has moved down from about $63 in mid-July to its current $61.66, or about 2.1%.
The stock really hasn't been punished severely despite the very bearish news of iron ore prices at five-year lows. Why? The lowest cost producers survive. Rio has deep pockets to stretch things out much longer.
I'm not an incredible fan of mining stocks in general, but when they are at cyclical lows, you should be at least sharpening your pencil to see which companies will come out on top at the "iron ore hunger games".
This is classic cyclical movement, so longer-term investors can take advantage of market weakness.
Rio has a 9.8 price-earnings ratio, towards the lower end of its past PE averages. Scaling into a position is the way to go if you are interested in mining stocks.
Cochlear, the hearing aid and bionic ear device maker, is on the rise since bringing new devices onto the market recently. The devices are hi-tech and command a premium in pricing, way different from iron ore, but the company rises and falls on the development of new products.
That's why the stock still has legs even though it hit a new 52-week high of $73.32 at the start of September. Some customer demand was previously held up because they were waiting for the new products to come out. Now that they are, that pent-up demand will flow through the top and bottom line over the next 6 – 12 months.
The stock shot up from about $64 when its FY 2014 full year results were announced, even though earnings were way down. It is settling back down to that price range once more.
It has a 36 price-earnings ratio, so it's not cheap. That is at the top of its past PE range. Still, analyst consensus forecasts have earnings potentially doubling by 2017.
Although both offer interesting prospects, I am not drawn strongly to either. I would lean toward Cochlear because it is in the healthcare space, but it is still dependent on product releases and manufacturing issues.
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