Many strategists believe that the cyclical stocks have finished with their strong price performance and are likely to have peaked.
Personally I do not believe this. Please take a look at the attached graph on the mining conglomerate, Rio Tinto and its share price performance versus the S& P 500 Index. I have also included a valuation metric for Rio Tinto consisting of Enterprise Value / Trailing twelve month BBITDA.
The graph clearly shows in the recession of 2008-2009, Rio Tinto’s share price continued rising at the beginning of the recession , while the US equity market started going down at the same time. It was only after several months of being in the middle of the recession did Rio Tinto ‘s shares begin to decline.
Cyclical stocks tend to lag the overall market at the end of an economic cycle. In other words they do not go down initially as the benchmark index does.
Unless one believes that we are about to enter another economic recession over the next several months, which I clearly do not anticipate, cyclical stocks should continue to outperform the market. It is entirely possible that cyclical stocks may experience a 10-15% price correction after their recent strong performance, but any correction should be used as a buying opportunity to add to your current positions.
You can also see on the chart that Rio Tinto’s historical market valuation measured by its Enterprise Value / Trailing twelve month EBITDA is not currently trading at anywhere near the highest levels experienced over the last twenty years.
Do not be afraid to add to your holdings of cyclical stocks on any market corrections.