Just as the seasons come and go, business cycles also play their part in the growth of an economy. The companies that have endured the troughs and peaks of business are the good ones because they have staying power. However, they may not be the best long-term investments to make. For example, the earnings history of the U.S. "Big Three" automakers can attest to that. They could make great earnings during the boom years only to lose roughly the same in the lean ones. You need to buy cyclical stocks when they are at or near their business cycle low to get the best returns from them.
Analysts from several well-known investment firms are forecasting cyclical stocks to have a strong full year result in 2014. The earnings downgrades that are being attached to some are minor compared to earlier ones in 2012-2013.
The climate made by the mining pullback has pushed them to the front, to step up and deliver – and they are.
One of the main drivers of a rising housing market and improved consumer spending is interest rates. As the RBA ratchets down the cash target rate, mortgages become cheaper and leave more money in consumers' pockets to spend.
Cyclical stocks' earnings are expected to rise around 8% within this financial year. The heavy downgrades give way to lesser ones, indicating a change in the earnings cycle.
For Deutsche Bank analysts, housing related stocks are preferred for this low interest rate theme. Companies like Boral Limited (ASX: BLD) and Bluescope Steel Limited (ASX: BSL) for building materials; Stockland Group (ASX: SGP) and Lend Lease Group (ASX: LLC) for housing construction; Harvey Norman Holdings Ltd (ASX: HVN) for home furnishings and electronics.
Consumer discretionary stocks like Crown Resorts Ltd (ASX: CWN) for integrated resorts and casinos, as well as Nine Entertainment Co Holdings Ltd (ASX: NEC) for media entertainment, were tipped to grow earnings.
Foolish takeaway
Stock picking is still important even when you have a good idea about which industries to look into. You could be right about the industry, but wrong about the company. Look for good earnings history and strong financials.
