How To: Find Cyclical Stocks

Anyone who saw Priceline (NASDAQ:PCLN) this week can appreciate nailing a cyclical stock with strong, consistent growth. We see this all the time, but how do we consistently scan for these golden opportunities?

Cyclical growth stocks are a swing trader’s wet dream. According to Investopedia a cyclical stock is “A stock that rises quickly when economic growth is strong and falls rapidly when growth is slowing down.”

Famous fund manager Peter Lynch in his 1993 hit Beating the Street, listed cyclicals as one of the more important criteria when evaluating stocks.

Hedge funds and savvy traders have always put a premium on equities following cyclical trends, or exhibiting earnings growth reliably time after time. Periods of diminished growth or an overall depressed market often follows earnings or growth periods, allowing a trader an entry point on these juggernauts.

Check out this weekly chart for Priceline (NASDAQ:PCLN) for an example of a very strong performing consumer cyclical over the last few years.

So how do you find these stocks? Most cyclical investors will tell you to buy when the P/E ratio is low, and sell when the P/E ratio is high (when earnings are at the peak). The other criteria is simply via a stock’s price action. Analyze which months the price was high vs when it was low. Look at these values over an extended period of time and watch for a pattern. If you see a pattern you should be able to determine an entry and exit point.

One thing to keep in mind is that cyclicals often rise very quickly on positive news and drop very quickly in a less favorable market. Another important thing we learn from looking at historical earnings patterns on equities is that it is unpredictable, and like the overall markets does not always go our way. You’ll need to be nimble when trading cyclicals and keep in mind that a buy/hold type of strategy will have you pulling your hair out fast. The idea is to get in prior to a cyclical event, and be out quickly if the trade goes our way.

Many cyclical stocks live in the retail sector. AAPL, LULU, ATVI, are all examples. Stocks that revolve around some commodities, like agricultural yields, are also normally following cyclical trends. Automobiles, housing, travel, you’ll find that many stocks often follow fairly reliable cyclical trends.

If you can find stocks that repeat a pattern year after year, you can really reap some big rewards. One impressive new tool I have been using this year to find depressed cyclical stocks is called TradeMiner. I’ll do a full review on TradeMiner soon but for more information you can check out their promo video. It’s well worth a look!