5 Cyclical Stock Picks for 2012
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A slowly improving economy, low price valuations and strengthening consumer spending numbers all point to a solid 2012 for cyclical stocks. Yes, I’ve heard all the arguments that 2012 is going to be another tough year, Europe will continue to be a drag and who knows how the Iranian situation will end up impacting global oil markets. Yada, yada, yada.
As we’ve seen this past month, even the slightest hint of good news is moving the market. Investors and consumers are just itching for something to lift their spirits and bolster their tenuous confidence. Manufacturing orders are up to their highest levels in six months, the aforementioned consumer spending and confidence are improving, and even housing starts have started to show signs of recovery. Okay, recovery may be a bit too strong a word, but early indications are good.
Taking all the above into account leaves us with a lot of potential for cyclical stocks, since they need an improving economic environment to thrive. And with such low valuations on several of them, the upside looks good. Here the five to keep an eye on in 2012:
Ford, Alcoa and Whirlpool
These are lumped together simply because we’ve traveled each of these paths in the past couple of weeks. They were good options then, and remain so now. The only thing that’s changed is they’ve gone up a bit. Auto numbers, as expected (at least by some of us), have been outstanding and we’ll see more of the same in 2012. And Ford (NYSE: F) will continue to benefit.
Car sales, along with increased manufacturing orders, places Alcoa (NYSE: AA) right in the sweet spot for cyclicals and offers outstanding potential. And finally Whirlpool (NYSE: WHR) will provide investors solid returns along with a 4.1% dividend, particularly once the company irons out union issues and the filing of petitions against the competition. WHR claims Samsung and LG Electronics are selling their appliances for less than cost to gain market share; a definite no-no for foreign companies importing their goods here in the states.
A little more expensive then others on our list of cyclicals, at least for now. The stock is trading over 17 times earnings, which is pretty steep. In fact, a few analysts have downgraded the stock to a hold from a buy citing limited upside. But a couple of things worth noting here; one, compared to several of the big boys on the rail transportation block Union Pacific (NYSE: UNP) is priced competitively. Both Kansas City Southern (NYSE: KSU) and Burlington Northern (NYSE: BNI.DL) are more expensive than the $52 billion market leader.
There are also a number of leasing contracts UNP is expected to re-negotiate this year, which should increase revenues as a result. And that comes on the heels of 4 consecutive quarters of revenue growth. Also, increased manufacturing orders means someone's got to get all that merchandise from point A to point B, and UNP will benefit.
Deere and Company
Don’t wait too long to get on board Deere and Co. (NYSE: DE). This is the perfect example of the beaten down cyclical stock poised and ready to move. The stock traded as high as $99.80 in the past year compared to today’s price of $80.58. That’s brought the price down to a mere 12 times earnings. What is particularly intriguing about DE in 2012 is the construction business. I know it’s a bit scary to think about an actual turnaround in the housing and construction industry, but we’re starting to see the signs.
Another positive for Deere investors are the agriculture and forestry businesses. If you can’t wrap your arms around a housing recovery just yet, the $32.6 billion company has other means of generating revenue. Certainly all are dependent on the economic environment, but that’s what cyclicals are all about. A nearly 20% jump in year-over-year revenue last quarter also bodes well for 2012.
The investment opinions included are just that, opinions. Tim is not a licensed investment professional, nor has he been for several years. Investing involves risk, as you well know, so consider your decisions wisely.