Cyclical Versus Consumer Stocks

02/23/2015 12:01 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Choosing cyclical or consumer stocks is generally based on your view of the global economy, but MoneyShow's Jim Jubak has some reasons to question the conventional logic.

Okay, so there are cyclical stocks. These are industrials and other companies that, you know, you buy a lot of trucks, then the demand for the trucks goes down and the stocks go through a cycle of slowing demand, collapsing demand, and then go back up; so that's a cycle. That is why they are called cyclicals. Companies like this are General Electric (GE), Cummins (CMI), Deer (DE), Caterpillar (CAT), etc. A lot of these are big industrials.

On the other hand, you have consumer stocks. These are not cyclical. The idea is the demand for Coke (KO) doesn't ride a cycle. The demand for Pepsi (PEP) doesn't ride a cycle. They are pretty much steady. At a time when you are worried about the global economy, the conventional wisdom is that you go with the big, steady consumer stocks and you avoid the cyclicals because, after all, they are cyclical.

At the moment, however, I think maybe it is time to think at least a little bit about reversing that assumption. That what we're seeing is the big consumer companies actually struggle for growth, that some of it is generational, that you are seeing a decline in consumption of carbonated soft drinks like Coke and Pepsi because of preference for waters or juices or energy drinks, or whatever. That part of it is that. Part of it is also just the slowdown in some of the developing markets, so if China slows it means a little less demand there, and we collapse in the Russian economy. All those things are making growth for the Pepsi's and the Coke's of the world and McDonald's of the world a little less certain, a little more risky.

On the other hand, the cyclicals are looking actually kind of predictable. It is not to say that they are not seeing the same cycles, but what we are seeing right now is cyclical after cyclical say basically, hey, you know we're looking at a tough first half of 2015; but the second half is looking better. We're hearing this from companies like Caterpillar and Cummins and General Electric. All that really means is that right now if you're looking for stocks that are trading kind of on the low side of their price you might want to look at some of these cyclical companies because, after all, everyone knows that they are not safe as consumer stocks. On the other hand if you look six months out, these might be the stocks that you want to own basically because of the predictability of that turn in the cycle if these companies management actually do know what they are selling and what their consumers are asking for.

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