Use the cycle to reap benefits

With Indian stock market looking for its direction, equity investors are hard-pressed to search opportunities for reaping gains. But if one looks carefully, there are a few specific themes, which have carry potential. These are cyclical stocks, which move in sync with broader economic scenario or sectoral fortunes and whose performance is very much dependent on economic ups and downs. In fact, the financial situation of these companies is highly dependent on various macro factors and if these factors show fluctuations, this, in turn, is reflected in the performance of these companies. Another important thing to note is- these companies flourish during specific periods of the year and these cycles repeat themselves. Consequently, share prices of these companies move in predictable patterns.

Experts are of the view that these can be bought for short term (a few months at least) for reaping significant gains. Looking at it with investors' perspective, these stocks can improve the return of their portfolio if one is able to buy and sell these stocks at right time. Means, timing is really crucial as far as getting benefit from these stocks is concerned. One should note that he should be able to enter in these stocks before the start of up move and exit from these before they start falling. Let us have a look on these stocks. 

Rail stocks

Kernex Microsystems (India), Kalindi Rail Nirman (Engineers), Titagarh Wagons, BEML, Stone India, Texmaco and Hind Rectifiers; what is the similarity among these stocks? These stocks have shown regular tendency of surge prior to rail budget in comparison to benchmark indices. In year 2008, the railway budget (for year 2008-09) was presented on 26th February. On the day, BSE Sensex touched the level of 17,860 on higher side, posting a rise of 5.37 per cent in comparison with the closing of February 13, 2008. During the same period, share price of Kernex Microsystems (India), Hind Rectifiers, Texmaco and Kalindi Rail Nirman (Engineers) zoomed in a range of 28-36 per cent.

The railway budget for year 2009-10 was presented on the floor of parliament on July 3, 2009. Sensex touched the high of 14,946 that day, which resulted in over 23 per cent growth in comparison with the closing level of 4th May 2009. During the same period, shares of BEML, Texmaco, Titagarh Wagons, Kalindi Rail Nirman (Engineers) and Kernex Microsystems (India) had soared in three digits.  

AC stocks

Demand for summer-related products is cyclical or seasonal. A number of products like fans, coolers, air-conditioners and refrigerators show higher demand during summers, especially in north India. So, it makes sense to go for summer-demand related seasonal stocks like Bluestar, Whirlpool, Hitachi Home, Voltas, IFB Industries and Bajaj Electricals. If we look at the past trends of these stocks, these have shown surge during the months of summer-that is, the period between May and October. Barring 2011, the performance of these stocks has been encouraging during these months. During these months in 2009, the stock of Bajaj Electricals surged over 267 per cent, while Whirlpool soared around 261 per cent. Other stocks like Bluestar, Hitachi Home, Voltas and IFB Industries reported increases in the range of 91 to 168 per cent, while the Sensex had jumped nearly 40 per cent during the period.

The trend continued in the summer months of 2010 as well, when Voltas, Whirlpool and IFB Industries went up by 35.69 per cent, 57.32 per cent and 81.03 per cent, respectively, while the Sensex rose around 14 per cent. 

Auto stocks

The last few months of the year bring happiness for consumption-driven companies. As the demand for their products increases due to festive season, this, in turn, boosts profitability of these companies. Sales of automobiles pick up during October to December on the back of festivals. As automobile companies benefit from this season, this is positive for auto stocks as well. However, the sector is feeling some pressure in demand currently due to various reasons, things may turn around if interest rates go down and monsoon fares better.  

In the festive season of year 2009, the BSE Sensex had soared 9.67 per cent, but BSE Auto Index outperformed the former with a growth of 24.42 per cent. The trend continued during the festive season of year 2010 as well. In that year, BSE Auto index had risen 21.08 per cent, while the Sensex had risen 13.43 per cent during the same period. 

Tours and travels stocks 

Summer months- beginning from April and stretching to July- are the peak holiday season, in north India. During summer months a number of people start surfing websites of tour and travel companies or start approaching travel agents for planning their trips. Due to this demand, companies related to tours and travels report a surge of 40-50 per cent in their business during the April-June quarter over the previous quarter. Experts say that the increase in business benefits the stocks of these companies too.

During May-October 2010, stock prices of International Travel House, Transcorp International and Cox and Kings surged 61 per cent, 25.33 per cent and 14.61 per cent respectively. During May-October 2009, stocks of International Travel House and Thomas Cook had shown a jump of 50 per cent and 29.67 per cent respectively.

Other old economy sectors such as cement, chemicals and banks as well can be classified under cyclicals as they move in tandem with the economic growth or downturn or economic policies such as interest rates. Stocks related to these sectors as well move in patterns in normal situations and investors can take benefit of these patterns.  

Things to remember 

How much encouraging the past trends may be, investors need to assess the fundamentals of the companies before making an investment in these stocks. Not only this, one should not invest each and every company of the sector, they must zero in on a fundamentally sound company. Besides, one should take into account the credibility of management, track record, market positioning of various products and distribution strength of the specific company.

Apart from that, the relative valuation of the stock with other stocks should be taken into consideration. Generally, the best time to buy these stocks is when valuations of these stocks are down and share prices are below the book values. Experts are of the view that these stocks can be given a maximum allocation of 20 per cent in one's portfolio, however, it totally depends on risk profile of the investor.

One should not overexpose his/her portfolio to cyclical stocks. Reason behind this is very simple. Sometimes these stocks don't perform as per their pattern. Another important thing to note is- sometimes these stocks start showing upwards move well before their specific period. Hence, one should keep an eye on the movement of these stocks.

(Published in Money Mantra)