Although the U.S. economy
has recently been on an unpredictable path, get ready to see more typical economic patterns take root. The economy is just get its footing now and should be a bit better in 2013. And, if history is any guide, it will have practically recovered by the middle of this decade.
To be sure, a lot of companies are still speaking of challenging industry conditions, but remember that "investors always look ahead." So they will soon start buying up companies that tend to really benefit when the economic cycle is in a clear upward phase. Smart investors will want to begin looking at these stocks now.
Tricky to value
At first blush, these cyclical stocks may not seem especially cheap relative to the rest of the market. They have to sport medium to large price-to-earnings (P/E) ratios on near-term results, but need to be valued against what they might earn when the economy is on strong footing, known as "peak-cycle profits." These stocks rarely trade for more than 10 times peak-cycle earnings, so several bargains abound when using this yardstick.
Take Manitowoc (NYSE: MTW) as an example. This maker of cranes and other construction equipment saw sales and profits start to rise early in the last decade, hitting the peak of the cycle in late 2007 and early 2008.
At the end of 2003, this stock looked expensive, trading for more than 90 times profits. At the end of 2004, the P/E ratio was a still-high 25 -- based on trailing earnings -- but 3.5 times what the company would generate by 2007. The fact that the stock ran to $45 by November 2007 (before a year-end pullback to $36.67) was a clear case of too much investor enthusiasm.
This stock is now below $14, and by using the rule of thumb of a peak-cycle P/E ratio of 10, it could move up to $25 or $30 in the next few years. "There is still substantial upside to a 2014E mid-cycle value of $23 in a continued U.S. nonresidential recovery," Goldman Sachs analysts note.