The Return of Cyclical Stocks

10/01/2013 8:00 am EST


John Stephenson

President and CEO, Stephenson & Company

John Stephenson talks about how the US economy is turning the corner, and which cyclical stocks are poised to benefit from its resurgence.

SPEAKER ONE:  We’re talking about cyclical stocks with John Stephenson.  Hi John, how are you?


SPEAKER ONE:  Now John, recently we’ve seen a big sell-off in some of the early stage cyclical stocks, particularly the home builders and the retailers and some of them have been up 700, 800, 900% from the March, 2009, lows.  But you’re saying that you expect a revival in the cyclicals in this market.  Can you explain what you’re…

JOHN STEPHENSON: Sure, I think it’s not all cyclicals, of course, but we saw in early May was a shift from defensive, so the utilities, the pipelines, the REITs…..

SPEAKER ONE:  Those are the real dividend-producing stocks that have been really ruling the market for about a year or so.

JOHN STEPHENSON:  They’ve been doing great for a couple of years and then what happened is we had this taper talk and from that time, we’ve had the ten-year Treasury rates move up from above 1.5% to 2.8 almost, so that’s been a massive move.  Everyone knows right now, where the market thinks that rates are going up to 3, 3-1/2; that’s what the market thinks, so I think anyone holding one of those classically defensive names, whether they be the telephone names, Time Warner, Comcast, etcetera, are going to be in for a rough ride.  What we’re starting to see is a pick-up in the industrial economy.  We’ve done a lot of mapping of how the investor economy relates to the S&P and the correlation’s very high.  It’s around 90% correlating, so what we’re seeing is that ISM number in the U.S., the manufacturing ISM number currently coming from below 50 to 55.4, that’s signaling a turn in the market.  I know we have a little volatility currently, but how I’m positioning my portfolio is for the cyclicals that lead early into a recovery in markets.

SPEAKER ONE:  Interesting, so you’re really saying it’s almost like a déjà vu all over again.

JOHN STEPHENSON:  Well, it is déjà vu all over.  I think that the best place to be, quite frankly, is the financials in the U.S. because they’ve been a rerated industry, so not only are the cyclicals that tend to move earlier, so if you believe that the markets are improving, if you believe the U.S. has turned the corner, then you want to be somewhere that not only will benefit from that change, but is trading at several multiple points below it’s historic average.

SPEAKER ONE:  Also I think if you look at the stock compared to their peak, they’re way, way down from where they were.

JOHN STEPHENSON:  Way, way down.  You look at names like Citigroup or KKR or Blackstone.  These are all companies that will do well if you think there’s a recovery going on in the market.  They’ll have more things they can monetize.  They’ll be able to gather more assets, all of that will be positive.  I also think tech is another area where it’s been in the doghouse for almost a decade right now and you’re getting valuation.  You look at Apple and you see it trading at multiples of six or seven.  I’m not suggesting that’s…..

SPEAKER ONE:  It’s had a big rally though, from 390 to over 500.

JOHN STEPHENSON:  It certainly has had a rally, but still on a fundamental basis, these are not expensive names and, again, they’re geared towards a recovery, and so you’re looking at sectors that are cheap, that will do well when the market turns positive, and it is starting to look like it will turn positive, because the real economy is healing.

SPEAKER ONE:  Do you own any of the stocks you mentioned personally or professionally? 

JOHN STEPHENSON:  I own them all.  I think Qualcomm is one of my top picks in the technology space.  I own that and we own these names professionally as well, including all the money center banks in New York.

SPEAKER ONE:  The Qualcomm’s ticker is QCOM.


SPEAKER ONE:  Thank you very much.

JOHN STEPHENSON:  You’re welcome.

SPEAKER ONE:  We’ve been speaking with John Stephenson on the video network.

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