Four Reasons to Cash in On the Strongest Economy in 38 Years
MarketWatch sees the insider selling at sensitive-to-the-economy companies like Carnival Corp. (NYSE:CCL), The Walt Disney Co. (NYSE:DIS), Goldman Sachs Group (NYSE:GS), Morgan Stanley (NYSE:MS) and Yum Brands Inc. (NYSE:YUM) – and views it as a possible warning that “the end has arrived” for cyclical stocks.
Investor’s Business Daily peruses S&P 500 market data and concludes that American Airlines Group (NasdaqGS:AAL) and other cyclicals are “grossly overvalued.”
And Barron‘s hammers the stake all the way into the cyclical story – cautioning investors that tied-to-the-economy stalwart U.S. Steel (NYSE:X) is “one of the most-overvalued stocks in America.”
Nervous Nellies all of them. Sycophantic mouthpieces for a hidebound Wall Street.
Tune them out, I say. They’re wrong.
Indeed, I like all those stocks.
All of them.
Running Higher and Higher
These stocks still have plenty of room to run a whole lot higher.
That’s the problem with listening to the Wall Street pros – and the risk of following “The Crowd.” Their stodgy guidelines and stuck-in-the-past thinking haven’t kept pace with the new realities and a tech-driven future.
This out-of-step-with-the-times philosophy is akin to an investment straightjacket – one that’s doggone uncomfortable, restricts movement and puts the windfall profits just beyond your reach.
In the strictest sense, we’re talking about the shares of companies whose businesses are super-sensitive to the “business cycle.”
At least, that’s the textbook definition – the one the big institutions adhere to. And that’s also the problem. The analysts, money managers, hedge-fund operators and other profit potentates who together make up “Wall Street,” categorize “cyclical stocks” in very narrow ways. And as the words those Wall Street boot-licking publications prove, those overly restrictive definitions have pros fretting that “cyclicals” have run too far too fast.
I’m not in that camp.
And I’m not making that mistake.
You see, I’m not constricted by Wall Street’s standpat orthodoxy. I see broader vistas. I look at the biggest and best opportunities for making money – regardless of labels
For me it’s not a question of the best cyclical stocks; it’s identifying which companies will benefit from the paradigm shifts we’ve seen in finance and technology – all supercharged by the most-powerful economic growth in 38 years.
Just because these tied-to-the-economy “cyclical” stocks have zoomed a long, long from their depths doesn’t mean they can’t keep climbing.
The reality is that they can. And they will.
I’m going to show you why.
The Four Cyclical “Cash-In” Catalysts
Just to give us a little bit of context, let’s start by with the “traditional” take on a cyclical stock. Here we’re talking about companies whose fortunes ebb-and-flow in tune with the broad economy. And their shares trade in pretty much the same way: They soar ahead of an economic bounce-back and tend to peak ahead of the economy’s zenith – starting their skid before the economy swoons itself.
Classic cyclical plays include carmakers, steel producers, airlines, travel businesses, entertainment firms and commercial-construction companies. As a moribund economy is jumpstarted, and crawls out of a recessionary abyss, these cyclical companies see big surges in their sales and profits – and their share prices rocket in kind.
Of course, that’s in a typical economic cycle.
And thanks to COVID-19, this cycle has been anything but typical.
The pandemic triggered an almost-total collapse in U.S. economic activity almost exactly a year ago. And that set the stage for a truly unique rebound – one fueled by paradigm shifts in technology, entertainment, healthcare and workplace practices.
As more Americans are vaccinated, as we approach some measure of herd immunity, as more states open for business (it’s about time California) and as pent-up demand gets unleashed, hungry consumers are going to stampede into restaurants and bars, embrace travel, leisure and entertainment with unparalleled ardor, and buy furniture, cars and homes with an enthusiasm not seen in decades.
Economists are saying this. And so am I.
With consumers having stashed away money at record rates, with households in great shape paying down debt, with credit-card delinquencies plumbing lows, with the stimulus spigot fully open – all back-dropped by a White House looking to spend trillions on job-creating infrastructure projects – U.S. consumers have never been in a better place to do what they love to do: Spend, spend, spend.
That’s pretty much the case-study catalyst for “cyclical” stocks – and it’s a valid-and-powerful scenario at that.
But see the bigger picture. I’m not limiting myself to Wall Street’s confining, straightjacket analysis. I’m not thinking “cyclical” stocks. I’m thinking “surging economy” stocks – and powerful ones, at that.
I’m looking at an economy that’s really just started its run. It’s one that’s going to grow at record rates this year, continue that growth in 2022 – and probably keep surging well after that. I’m also looking at four unique catalysts that make this one of the most-unique rebounds in memory – understanding that this “uniqueness” is creating a wide-open opportunity to make money in so-called “cyclical” stocks.
And we’re going to run through them right now.
- Cyclical Catalyst No. 1: The “FOMO/ROMO” Jet-Stream: Rising stock prices tend to keep rising as higher prices attract more investors which then fuels additional momentum. The emotion at work here is labeled as “FOMO” – the fear of missing out. As the economy shows its true growth potential and cyclicals prove they’re the place to be, FOMO will drive more investors into these economically-sensitive shares. Also going to work here will be FOMO’s second cousin: ROMO – the risk of missing out. As the powerful economic rebound fuels inflation, and as the endless rounds of stimulus force Washington to boost taxes, the surge in economically sensitive stocks and overall rising stock indices will make investors realize that not investing in stocks puts them at real risk of not being able to cover their taxes or to keep pace with rising prices.
- Cyclical Catalyst No. 2: The Great Rate Assist: Continued low rates on the short end of the interest-rate curve will facilitate credit expansion even as interest rates rise further out on the yield curve. Rising rates aren’t a problem for economically sensitive stocks if those rates are escalating because of a strengthening economy (and not because of rate increases by the U.S. Federal Reserve). In fact, rising rates will power cyclicals higher exactly because they signal future growth.
- Cyclical Catalyst No. 3: Manufactured Optimism: The ISM Manufacturing Purchasing Managers Index (PMI) is expanding – in fact, has only been this positive three times in the last 40 years – and that’s a huge positive for cyclical stocks. Consumer optimism was markedly – and unexpectedly – strong in March. The fact is that we’re experiencing a sustained manufacturing boom not seen since the Reagan administration. If the PMI keeps trending higher – and it has room to move substantially higher – cyclicals will reflect that expansion trend by also trending higher.
- Cyclical Catalyst No. 4: Profit Power: Rising profits are the key ingredient for rising stock prices. And corporate profits rise when the economy rebounds. Economists surveyed by The Wall Street Journal just boosted their 2021 growth-rate forecast to 6.4% – one of the few times in the last seven decades the American economy is expected to grow that fast. I expect earnings to grow at an average of at least 2% per month, which translates to 6% per quarter, at least. But, economists expect growth to slow to 3.2% next year, which would still make 2021-22 the strongest two-year performance since 2005. Also, second and third quarter 2021 earnings “comps” to the second and third quarters of last year will show tremendous relative earnings growth, especially for cyclicals.
These four catalysts will put a lot of air beneath the wings of cyclical stocks – while also providing a jet-stream tailwind that we can ride… and cash-in on.
I’ll tell you about my favorite cyclical stock tomorrow, but there are over 50 more that I need you to see right now.
I compiled a list, hand-tailored to suit the chaotic times we are experiencing right how. Even with the pandemic coming to an end, the way we live, work, and play has been changed forever. And it will keep changing, if this administration has anything to say about it.
If you want a complete list of stocks to buy and stocks to leave in the dust, and never look back, then don’t pass this up.
Till next time,