Stocks That Could Lead The Pack In An UpturnDon Dunn
What do you do when growth stocks stop growing? If you're Michael Landry, who heads Mackenzie Investment management, you shift into cyclicals. And you'll find other investment pros headed the same way in the wake of the Nov. 15 market slide that sent cyclical prices down about 5.6% vs. the 43% dip in the S&P 500.
Cyclicals are companies in such industries as airlines, automobiles, mining, and steel, where earnings depend heavily upon the booms and busts of the business cycle. The idea is to move in when a business has been soft and profits are down. And you need the disipline to sell when the company is showing strong earnings. One tip-off to sell a cyclical: a low price-earnings ratio. It shows that investors believe the company has peaked.
"We're not saying there aren't opportunities out there in growth stocks," says Landry, whose Mackenzie American Fund is now 89% in cyclicals. "But we're banking on a modest recovery starting late in the first quarter that will be led by investment spending, rather that consumer spending."
Pressed Metals. Consequently, he sees earnings moving up briskly at such companies as Amax and Phelps Dodge. Squeezed by the recession, the metals companies have worked hard to lower costs. So they stand ready to reap extra benefits from an upturn. Landry is also impressed by cost-cutting at the auto makers-especially at Ford. "Auto stocks have been beaten down so badly, they represent a good value," he says.
Kemper Securities' Rao Chalasani is betting that fiscal stimulus early in the election year will spur economic growth of 2% to 2.5%, enough to propel earning of some cyclicals. So he's bullish on the outlook for some technology companies whose products are almost as basic to industry as copper or other commodities. He includes chipmakers such as Motorola and communications equipment manufactures California Microwave and Octel.
Even Rich Freeman, asset manager for Shearson's Aggressive Growth Fund, is giving increased weighting to cyclicals. He's watching disk-drive maker Quantum and Network Systems.
Most of these analysts are betting on cyclicals because they believe President Bush will do something to get the economy moving in 1992. But if the recession drags on, all bets are off.