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Is The Play In Cyclicals Overdone?

Updated: Oct 19, 2021

A year ago the going price on much cyclical paper was around 5 bucks a share. But most commodity plays in copper, steel, aluminum and oil service have sprinted around the clock several times past 12 months.

Halliburton based out at $4.25 a share now ticks around $20 while Freeport-McMoRan copper is pushing into the thirties. The most polite cyclical of all, Schlumberger was $16.87 past March, now $26.

Even General Electric doubled, from yes, 5 bucks while Macy’s tripled after posting huge operating losses. Shopping centers, anybody? The 52-week low on General Motors hit 14 dollars and change. Nobody wanted US Steel at $4.54, now over $16.

What’s going on? A year ago, pundits all waxed bearish, a Covid-19 bred recession loomed. Leveraged cyclicals faced the hangman. Even Occidental Petroleum, a self-made leveraged disaster at $8.52 down from the fifties.

But, 2 trillion dollar capitalizations like Apple doubled over 12 months so you could counter why take ultimate financial risk owning ragamuffins.

Reason is once a viciously cyclical company weathers bankruptcy risk it can double or triple over 12 months. General Motors shot from $14 to $57 without me (asleep at the switch!)

Biggest question to ask yourself is what’s the fundamental earnings power of a stock facing hard times if and when the cycle turns up? Then factor in average earnings power of the stock-good year, bad year, average one. If this average comes in under 10 times earnings, close your eyes and give the animal a home. No need to throw darts.

Ask yourself about the price trajectory of GameStop. Well, GME carries with it no earnings power or even book value substance of more than a couple of bucks. I don’t know of any day traders who built fortunes they nailed down.

When the music stops, who’s left to pick up the pieces?

With some 60 years as an operator, I hardly ever took the short side. I love to bet on entrepreneurial energy. Consider Warren Buffett, Bill Gates, even Zuckerberg and Bezos today. My old heroes embraced Edwin Land of Polaroid and Joe Wilson, headman at Haloid-Xerox, later just plain Xerox.

I met Rupert Murdoch when he bought New York Magazine which I part-owned as a venture capital play. Rupert built Fox into a major media house from scratch. His market capitalization dwarfs the Sulzberger’s New York Times property which has been around 150 years.

Currently, I am in love with MLP’s where you still can find 9% yields fully covered by operating cash flow. Enterprise Products Partners is the most conservative play, easily living within its numbers, not extended by too liberal a shareholder distribution which is partly a return on capital.

Meantime, the yield on 30-Year Treasuries is hardly more than 2% with 10-year paper of late oozing past par to 1.17%. At some point, the price-earnings ratio of the S&P 500 Index won’t hang in at 20 times earnings. Let’s hope this event isn’t around the corner where bonds are good competition to stocks.

If your portfolio doesn’t carry a strong reflation theme embracing cyclicals, financials like Citigroup and Goldman Sachs, you may be left at the post. Let somebody else own Coca-Cola, Pfizer and other polite properties. Bound to be underperformers. My go against the grain growth stock is Alibaba, but so far I’m wrong.

Is Warren Buffett still the smartest guy in the room? Maybe not. Berkshire Hathaway’s portfolio has underperformed its benchmark S&P 500 Index these past five years.

If you didn’t make at least 10% 4th quarter of 2020, you musta been asleep. Actually you shoulda posted over 15% which is what the NASDAQ 100 posted. Citigroup rose 50%, Halliburton practically doubled and Freeport-McMoRan galloped ahead effortlessly.

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