Skip to main content

Cyclical companies – those whose fortunes tend to rise and fall along with the broader economy – have been performing much better than expected in recent months, indicating that economic growth may be better than many thought.JAE C. HONG/The Associated Press

John Reese is CEO of and Validea Capital, and portfolio manager for the Omega Consensus funds. Globe Investor has a distribution agreement with, a premium Canadian stock screen service. Try it.

Throughout 2013, investors and pundits have been fretting about economic growth, with concerns about China's slowdown, Europe's recession, and the United States's unspectacular expansion all playing a part.

But lately – though the bears probably don't want to believe it – the economy has been delivering some encouraging news.

Cyclical companies – those whose fortunes tend to rise and fall along with the broader economy – have been performing much better than expected in recent months, indicating that economic growth may be better than many thought.

Consumer discretionary companies were on track to grow earnings at a 10.2 per cent pace in the third quarter versus last year, well ahead of the 6.5 per cent that analysts expected, The Wall Street Journal recently reported. Materials companies and technology firms, meanwhile, were on track for growth of about 9 per cent, versus estimates of 1.3 per cent and 1.4 per cent respectively, while industrials, expected to grow about 4 per cent, were on pace to post 6.3 per cent growth.

That's helped many cyclical stocks outperform the broader market over the past couple of months. Still, many cyclicals continue to trade at very attractive valuations and look as if they have more room to run. In fact, Liz Ann Sonders, chief investment strategist at Charles Schwab, recently told Fox Business Network she thinks cyclicals are the place to be heading into 2014.

Ms. Sonders noted that in the bull market's most recent leg upward, more defensive sectors have been leading the way.

She thinks that has left cyclicals looking quite attractive.

I agree.

My Guru Strategies, each of which is based on the approach of a different investing great, are finding numerous bargains among cyclical stocks. Here's a look at a few U.S. cyclicals and one Canadian cyclical that these models are high on.

As always, you should invest in stocks like these as part of a broader, diversified portfolio.

Worthington Industries Inc.Ohio-based Worthington processes steel for a number of markets, including the automotive, construction, hardware, and aerospace industries. It has operations in 11 countries, and recently finalized a joint venture agreement in China.

My Peter Lynch-based model likes the company's reasonable 18.2 price-to-earnings ratio and its 28.4 per cent growth rate in earnings per share (EPS). That makes for a very strong 0.64 PE-to-growth (PEG) ratio, a metric Mr. Lynch pioneered to gauge value. My James O'Shaughnessy-based growth model likes that Worthington has increased its earnings per share in each of the past five years, and that it has a key combination of qualities: a low price-to-sales ratio (1.06) and high relative strength (83), a sign that the market is embracing the stock but that shares remain reasonably priced.

Intel Corp.

This computer-chip giant has taken in more than $52-billion (U.S.) in sales over the past year. The California-based firm is another favorite of my Lynch– and O'Shaughnessy-based models. The Lynch approach likes its 13.2 P/E and its 25.3 per cent long-term growth rate, which make for a 0.52 PEG ratio. Mr. Lynch liked financially conservative firms, and this model approves of Intel's reasonable 24 per cent debt/equity ratio. My O'Shaughnessy-based value model looks for large firms with strong cash flows and good dividends. Intel is plenty big enough, and its $3.53 in cash flow per share more than doubles the market average. The model also likes its solid 3.7 per cent dividend.

Polaris Industries Inc.

I wrote about this Minnesota-based firm back in March, and since then its shares have jumped more than 50 per cent. The company makes off-road vehicles (including all-terrain and side-by-side vehicles and snowmobiles) and on-road vehicles (including motorcycles and small electric vehicles), and it's still high on two of my models's lists.

The Lynch approach likes its 30.3 per cent long-term growth rate and 0.89 PEG. My Warren Buffett-inspired approach likes that the firm has upped its earnings per share in all but two years of the past decade, has just $104-million in debt versus $361-million in annual earnings, and has averaged a 40.3 per cent return on equity over the past decade – a sign it has the "durable competitive advantage" Mr. Buffett likes to see.

Teck Resources Materials firms have had a rough few years, and this Vancouver-based company, which produces copper, steelmaking coal, zinc and energy, has been no exception. But my O'Shaughnessy-based value model thinks it's been hit too hard, and with cyclical growth surprising on the upside, Teck is worth a long look. The strategy likes Teck's hefty size as well as its strong cash flow ($5.44 per share versus the market mean of $1.25) and solid 3.2 per cent dividend yield.

Disclosure: I own shares in Polaris, Intel and Worthington.