3 Cyclical Stocks to Consider as Monetary Expansion Ends

Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As the sustainability of the U.S. economic recovery became more apparent to investors, stocks pushed the major benchmarks higher. But not everything came up roses, as it became apparent that the Federal Reserve (Fed) might begin to tweak monetary policy going forward.

The defensive sectors were hit hardest as investors pondered the recent words of Fed Chairman Bernanke. The nervousness that surfaced in May saw three of the S&P 500’s defensive sectors fall hard: utilities, telecommunications and consumer staples dropped by 9.58%, 7.44% and 2.39%, respectively. 

I think this trend is here to stay and it might be the time to take some long positions in cyclical companies. Here are three high quality and fairly valued cyclical stocks that could be great investments given the ongoing US economic recovery.

The car era is not over

Ford (NYSE: F) is not only the best US car company, but also still trades at a fair price for its value. Even after its 22.8% year to date gain, I think Ford could be a good long term holding.  

Despite the lack of near term catalysts, Ford appears to be firing on all cylinders operationally and the company is close to a great milestone: reaching breakeven in Europe. For the first quarter this year, Ford reported adjusted EPS of $0.41, beating consensus estimates by almost 11% and delivering much better than expected results for its European operations. Even if it sounds counterintuitive for a US car company, shrinking losses in Europe (estimated at $2 billion in 2013) will likely be the primary driver of earnings growth for Ford over the next few years.

Trading at a 10.9 P/E, 5.8 EV/EBITDA and paying a 2.55% cash dividend yield, I think Ford is still a compelling choice.

The construction to mining machinery world-wide leader

Even when Caterpillar (NYSE: CAT) reported a first quarter earnings miss, I think the reasons for such a miss were temporary. Total sales declined 17% year over year largely due to inventory cuts and moderate demand. Those events were expected and I suspect the inventory glut should not last more than a few more quarters. On the other hand, good news came from more resilient factors. Operating margins, for example, were up by 25% thanks to better expense management and lower costs of materials.

Besides, Caterpillar announced a resumption of its share repurchase plan, and I expect the buy-back to go as high as $1 billion. Even while many questions -- such as the amount of inventory that has yet to be burned -- remain unanswered, I think Caterpillar is a resilient company that has built a strong business and should perform well going forward. 

Trading at a 12.8 P/E, 9.2 EV/EBITDA and paying a 2.42% cash dividend yield, Caterpillar is an option to consider.

The cement champion

Cemex (NYSE: CX), the Mexican cement maker that currently makes 29% of its EBITDA from its US operations, is poised to keep outperforming the market. Cemex plans to increase capacity at its Odessa plant by 62% on the back of a positive outlook in the US. A few weeks ago the company announced its plans to expand production capacity in Texas to keep up with the region’s increasing demand.

Not only is Cemex expected to grow sales in the US with a recovering housing market, but the company is also becoming an active player in oil and gas exploration. The company is growing fast in its sales of specialty cement for the construction of oil wells and in the sale of materials for the growing fracking industry. 

With cement volumes gaining momentum, I believe Cemex could grow its year-over-year EBITDA in the US as much as 100% thanks to better pricing and booming volumes. Even if the stock is up by 21% year to date, I think its upside potential is still huge. The company has cut debt by selling non-core assets and floating other assets such as its Latin American operations and now trades at 9.5 EV/EBITDA and at a 1.2 price-to-book ratio.

Bottom line

The three companies named above hold long term value and could be part of any long term portfolio. That said, they should perform much better than the rest of the market in scenarios where GDP rises. The US economy has started its growth phase and with unemployment down, consumption and construction should boom in the coming years.  Even if all the companies above should perform well, among this group, I would make a bet on Cemex. Its US focus and its leverage on the construction business makes it a great long play. It's always easier to grow fast when you are starting from a lower base.  

Caterpillar is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in The Motley Fool's brand new report. Just click here to access it now.

Federico Zaldua has no position in any stocks mentioned. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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