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Commodity Cyclicals Are Not Long Term Bets

The following section discusses why commodity cyclical is never a good long-term investment. It discusses when it is appropriate to hold them and when it is appropriate to fold them.

 

  • Cyclical businesses are generally available cheap. The low P/E originates from the unpredictability of its earning stream. Such stocks should be bought when they are doing badly and sold when they are performing extraordinarily well.
  • Cyclicals are valued on the basis of their underlying commodity prices, so when the prices of the commodity is the turning point, the investors should buy or sell them near the turning points.
  • Another important way to look at cyclical stocks is to see their operating margin and ROE which are highest near to the top and lowest at the bottom. An expanded ROE of a cyclical stock is a sign of threat, whereas lower margin and depressed ROE remains a signal of opportunity.
  • Investors should look at the lowest cost producer of the cyclical stock as it will be the last company to go bankrupt during a downturn.

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