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Read the “Industry Nuggets” article to understand cyclical stock investment! Can cyclical stocks still “lie back and win”?
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The so-called “everything has a cycle”. Any industry is cyclical; there are differences in the length of the cycle, strength and weakness. Cyclical stocks are attracting the attention and favor of value investors in a changing market, and are often called “a treasure trove of value that can be tapped.” Investments in cyclical stocks are partly in line with investment types such as “cyclical type,” “hidden asset type,” and “difficult reversal type” in Peter Lynch's eyes.
Recently, cyclical industries such as coal, steel, crude oil, and metals have fluctuated for the better, and have continued to strengthen. Affected by the tense situation between Russia and Ukraine, etc., WTI crude oil once broke through the $130 mark, and Buffett boosted “Occidental Petroleum” positions one after another, and cyclical stocks have once again become “bastards” in the eyes of many investors. However, in actual investment transactions, how should we view this strong trend in cyclical stocks represented by crude oil? And how to seize investment opportunities in cyclical stocks?
This issue of “Industry Nuggets” focuses on the hot section of cyclical stocks, and provides all newcomers with a comprehensive guide to investing in cyclical stocks. Let's talk with you about tips on investing in cyclical stocks.
(1) What are cyclical stocks?
Cyclical stocks refer to stocks of listed companies that fluctuate with the boom and bust cycle of the economy. Specifically, during periods of economic prosperity and full employment, cyclical stock prices rose; while in periods of economic recession and declining employment rates, cyclical stock prices fell. Corresponding to this are non-cyclical stocks. Non-cyclical stocks are linked to companies that produce essential goods. Regardless of economic trends, people's demand for these products will not change much, such as essential goods retailers, utilities, and healthcare.
The impact path is as follows: due to changes in supply and demand and changes in the economic environment, there are cyclical industry fluctuations, which drive changes in the company's profit, and ultimately reflect cyclical changes in stock prices.
Such stocks include industries such as coal, crude oil, iron and steel, non-ferrous metals, chemicals, cement, construction machinery, machine tools, heavy trucks, equipment manufacturing, aviation, aquaculture, and shipping.
(2) Investment logic of cyclical stocks
Popular girls discuss the investment logic of cyclical stocks based on common concerns of investors in the market~
~Is the price of crude oil the core of cyclical products?
As the saying goes, crude oil is the “mother of the cycle.” Changes in crude oil prices will continue to be transmitted downstream, which in turn will affect raw materials and all aspects of daily life. At the same time, as a commodity pegged to the US dollar, crude oil is also closely related to the US dollar cycle. Since commodities represented by crude oil have financial properties, when prices such as crude oil are expected to rise, there will also be an influx of hoarded commodities and speculators, increasing fluctuations in cyclical stocks such as crude oil. The rise in futures prices will also have an impact on product sales and the spot market, leading to an increase in related cycle stock profits, which in turn affects investors' expectations.
What are the characteristics of cyclical products?
1. Most are in the upper middle of the industrial chain.It is more of a primary resource, such as crude oil, minerals, etc.;
2. Product homogenization.Products upstream in the industrial chain require more standardization, so product homogenization is serious. In a market-based situation, when the industry is booming, enterprises produce at full capacity. When the industry is sluggish, enterprises generally have excess production capacity, product prices have skyrocketed and plummeted, and the pricing power of related enterprises is weak;
3. Some technical barriers are high and the development cycle is long.In industries such as mineral extraction and oil and gas resources, it takes a certain amount of time for capital projects to be completed and successfully delivered. The time cycle often spans several years, and the boom and bust of these industries can also be relatively long. The technical barrier is usually that there is a threshold for safety and environmental assessments, etc., and oil and gas resources have monopoly properties, which can easily cause environmental pollution and human casualties, so they are cautious in approval.
What are the key points of investing in cyclical stocks?
1. First look at trends, valuation assistance:The most important thing in investing in cyclical stocks is to predict and grasp trends and analyze the causes of cyclical formation, which generally include economic fluctuations, changes in demand, and market liquidity drivers. For example, in the face of crisis conflict and economic imbalance, products with strong monetary attributes will be favored due to risk aversion, and market liquidity will increase; it will further boost supply and demand, and ultimately stimulate demand. After a brief analysis of the trend, static valuation also played an auxiliary role. The core of the pricing of cyclical stocks is PE (price-earnings ratio) valuation, which is driven by price volume;
2. The core elements of investment analysis:Investment cycle stocks should focus on analyzing the fundamentals of listed companies from the four aspects of industry prospects, market position, performance flexibility, and production costs. Companies in the growth stage of the industry have low risk and high returns, and have the dual advantages of rising prices and sales; in the face of listed companies in the sunset industry, they can only choose leaders with low cost advantages, including environmental protection factors. As industry concentration increases, such companies may burst into big bullish stocks on a phased basis.
3. Reverse thinking, reverse investment:In terms of timing selection, investors should patiently search for potential opportunities, wait until commodity prices fall below the average dynamic cost line, and when their inventory, net market ratio, and price-earnings ratio calculated using average earnings over the full cycle of stocks are at historically low levels, and under the catalytic effects of supply contraction and demand expansion, they can consider purchasing in a variety of ways, and maintain pyramid positions.
4. The pace and timing of cyclical stocks is important:The investment method for cyclical stocks is different from growth stocks. Growth stocks can absorb their valuations through the continuous growth of profits; when investing in cyclical stocks, if you step in cyclical stocks at the right time, you will be on the fast track of financial freedom; however, if you step on the wrong pace, you can easily fall into the abyss of huge losses.
(3) In the present moment, how do you view the opportunities and risks of cyclical stocks?
Since the outbreak of the epidemic, oil prices have experienced a historical moment of “negative oil prices”. As the global supply chain is tight, global logistics costs have risen sharply. In the process of economic restart and recovery, global demand for commodity raw materials has increased, along with the global transition from traditional energy to clean energy and the advent of the US dollar interest rate hike cycle, which has further boosted commodity prices. The tense situation between Russia and Ukraine since February of this year has further stimulated WTI crude oil to reach the $130 mark. There are many opinions in the market regarding the future market of cyclical stocks.
At this point in time, how should we view investment opportunities in cyclical stocks represented by energy metals? What are the insights of the cowboys? Let's check it out with hot girls~
Q: What are the stages of investing in cyclical stocks?
Stage 1: Expectation stage, when the price does not rise, the stock price picks up first because some people are expecting it;
Stage 2: The stage where product prices rise. As product prices rise, corporate profit expectations improve, and stock prices rise;
Stage 3: Release of performance. The stage of product stagnation, when product prices rise to a high level, and performance begins to be released sharply, commonly known as the performance wave phase. Here is a situation where the boom cycle in some industries lasts a long time. When product prices are in the middle and early stages of rising, performance has already begun to be released. This situation should be classified as the second stage.
Q: What are the driving forces of the coal sector?
We believe that the driving forces driving the upward trend in the sector are as follows:
In terms of fundamentals, supply-side constraints are still stronger than expected, and the demand side will expand markedly in the context of steady growth, making it difficult to change the pattern of tight supply and demand. Combined with the recent sharp rise in international coal prices, coal prices will continue to be at a high level, and the sector's profit for the first quarter or even the whole year may be better than expected.
In terms of risk release, the sector underwent drastic adjustments in the early stages, and there was a strong understanding of policy intentions and tolerance. The medium and high coal prices given by the Development and Reform Commission raised the industry's profit stability expectations, relieved everyone's concerns about medium- to long-term profit uncertainty in the sector, and helped increase confidence in sector valuation and market allocation.
Q: How do you view recent trends in the energy metals sector?
The current rise in commodities is threefold: “Russia-Ukraine conflict+dollar cycle backflow+energy transition (high dependence on metals in the early stages of the energy transition)”, which correspond to the short, medium, and long term, respectively, further promote the strengthening of energy metals.” Among them, in the energy transition section, in the process of promoting new energy vehicles, demand for aluminum, copper, etc. has actually increased dramatically, further exacerbating supply constraints. However, tight supply and demand is a dynamic change in marginal prices. That is, under market-based conditions, when supply and demand are not balanced, prices will continue to rise, and prices will not balance and fall until there is balance or even overcapacity.
Recently, there has been a slight convergence in energy metals markets in Hong Kong and the US. This actually reflects the attitude of capital. So can the current trend continue?
From the perspective of technical analysis, the US energy metals (hot coal, aluminum, oil and gas integration) sector is still on the upward trend line, and the recent trend has continued to rise after stepping back on the BOLL line. In the context of interest rate hikes, compounded by geopolitical conflicts, I chose to continue to believe in the trend, and the trend will not reverse for the time being. If the US stock market strengthens and the technology stocks represented by the NASDAQ index rise, I will reconsider whether the above logic holds true.
Q: What is the current oil and gas stock market?
“As soon as a gun is fired, ten thousand dollars of gold”. Once an international war breaks out, it is difficult to escape the economic disaster that will sweep away. “Whether oil prices will enter the 9 yuan era” has become a hot topic of discussion. International oil prices have been affected by the Russian oil industry; rising is an inevitable trend. On the one hand, the “supply” situation in oil-producing countries is unstable; on the other hand, global demand for oil is increasing.
Next, short-term changes in oil prices will still depend on the progress of the Russian-Ukrainian situation. Some experts predict that high domestic oil prices will continue to run for at least half a year. After this special period, the price of oil may fall back and enter a normal range. As far as the current domestic market is concerned, the rise in oil prices caused by the Russian-Ukrainian war is only temporary; there is no need to worry too much about supply; there is no need for people to panic too much. However, under the oil boom, many industries affected by fluctuations may be able to “lose his horse; do you know if it's not a blessing?”
Q: How do you view the future trend of crude oil?
The future trend of crude oil will be determined by four major factors: how much Russian crude oil will actually decrease, how much crude oil exports will increase from Iran, how much demand will increase during peak summer travel periods, and how much OPEC+ production will increase in the future.
Among them, favorable factors include: how much Russian crude oil actually decreased, and how much demand increased during peak summer travel periods; negative factors include how much production can OPEC+ increase in the future, and how much crude oil exports from Iran will increase.
If the benefits are greater than the disadvantages between the two, crude oil will run between $80-110; if the downside outweighs the profit, crude oil will run between $65-90. Some of these existing factors will underpin oil prices. The OECD inventory is extremely low, with a five-year average of more than 0.27 billion barrels. If there is an oversupply in the market, a significant portion of the excess crude oil will be converted into this inventory.
Hot topics in cyclical stocks:
Crude oil prices have risen again, and the oil and gas stock market is back?Conclusion:After learning how to identify cyclical stocks and the logic of investing in cyclical stocks, mooer must have reaped a lot. Through your observation and thinking,What stage has the cyclical stock market reached? Next, how should we lay it out? Also, what are the star stocks that have you noticed?mooer are welcome to leave comments in the comment area. You will have a chance to get wonderful reviews188 point reward, let's share your unique views on cyclical stock investments~
Risk Disclaimer: The above content only represents the author's view. It does not represent any position or investment advice of Futu. Futu makes no representation or warranty.Read more
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