Cyclicals: Pendulum Plays

Is the upswing in sight? Try these.

If your crystal ball is showing a recovery in 2003, invest in cyclical stocks. As the name implies, these companies have profits and share prices that track the economy's ups and downs. And they often look their worst--their price-earnings ratios are highest--right before an upturn. Then p-e's come down as the profits kick in.

Industrial cyclicals such as chemical and paper stocks are usually the first to move higher during a recovery--and some pros are especially bullish on chemical stocks now. Morgan Stanley & Co. analyst Leslie C. Ravitz recommends both DuPont (DD ) and Dow Chemical Co. (DOW ) (He owns neither.) DuPont's stock, a classic blue chip with a conservative balance sheet, at $42.56 sports a generous 3.3% yield. He projects an 11% gain in net income in 2003. Ravitz is even more bullish on Dow, where he expects a 21% gain. He says the company will benefit from low inventories, which could lead to higher prices for its wares. And there's high hope for new management. On Dec. 13, the board replaced CEO Michael Parker with William Stavropoulus who will be under the gun to improve returns.

Take a look, too, at Caterpillar Inc. (CAT ), the world's leading manufacturer of heavy equipment. Since Cat has been sharply reducing costs in the past two years, any uptick in business should drop to the bottom line, says Dan Bandi, portfolio manager for the Armada Large Cap Value Fund. At $44.60, Caterpillar sells for 18 times 2003 earnings, and Bandi estimates the stock could be worth $65 in the next 12 months.

Another cyclical play is Alcoa (AA ), the world's No. 1 aluminum producer. Wendell L. Perkins of Johnson Asset Management in Racine, Wis., likes Alcoa because he thinks a global recovery will push aluminum prices higher. Perkins is looking for $30 a share, a 30% gain.

One warning: If the economic outlook suddenly turns bleak, be ready to sell. They're lousy buy-and-hold investments.

By Pallavi Gogoi

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