Jim (cont'd):     

Because most of the big fund managers, the Wall Street plutocrats are committed to sector based thinking… and they are the buyers and sellers who set the prices…not you… frankly this is not at all complicated… we are going to spend a second on it… you have two kinds of companies… there are cyclical businesses that do well when the economy is growing fast… when the Federal reserve has rates low… and they do not do so well when the economy slows down… okay…what this is depiction… how about autos… raw materials… what is know as consumer durables, think washing machines… heavy equipment, think the stuff that goes into an airplane… that kind of thing… these stocks get absolutely clobbered… when the economy is awful… and torn to shreds when the economy gets crushed.

And then you have your secular growth stocks… in addition to not keeping the Sabbath… these companies aren’t sensitive to the underlying strength or weakness of the economy… here is some examples, Kellogg, Proctor & Gamble, Johnson & Johnson, any of the utilities… these have secular growth.. they won’t be affected by the cycle… because we just don’t stop buying Band-Aids just because we are low on cash… we are not going to starve ourselves either… they are the stocks that you want to own during a recession… because the big money guys are going to be buying these hand over fist… why… because they want to own the safe consistency of these companies earnings… they want to sleep at night.

So how do you know when to buy the cyclic stocks and know when to buy the secular growth stocks… at the top of the business cycle… right before you think a downturn is coming… maybe because of a global financial crisis… maybe because of the collapse of an asset bubble… or maybe just because the Fed is about to raise rates… you load up on these secular growth stocks… at the bottom you swap out of all that… and you buy some beaten up cyclic stocks… now, it can take a long time to get from the top to the bottom… and it is worth buying the secular growth recession resistant names when the economy is about to look bad… or is bad… and then gradually swapping into the beaten down cyclicals… when you start seeing a little light at the end of the tunnel… and, yes, you need to see some stabilization, some little light, you can’t just bet that things are about to turn.

You know stocks move with their sectors… and sectors move with the business cycle… so what… doesn’t every Tom, Dick and shlomo out there know this already… don’t all the big players understand this stuff so well that there is no way to make money off it…don’t they have machines lined up to calculate how to make money like this… no, not quite… the reason that this is actually difficult… the reason you can make money off of this playbook… is that it is very counter intuitive on one level… when the cyclical stocks start to bottom, everyone cuts their earnings estimates for them… remember this is the bottom of the cycle, when economic growth is either slowed to a crawl… or stopped entirely… so the companies are suffering.. the estimates get slashed… but the stock has hit bottom… even if it is that kind of bottom… and it doesn’t go lower… that makes these stocks look expensive on what is known as a price to earnings multiple basis… when the earnings estimates come down and the share price stays the same… then the multiple goes higher… this is simple arithmetic… E(earnings) X M(Multiple) = P(Price)… I am going to emphasis that if you missed that, that it is in REAL MONEY… I have spent a huge amount of time on that formulation, on that equation… so that you understand it as if it were algebra in sixth grade.

Investors think that a high multiple makes a stock expensive… but these cyclical companies are at their most expensive on a price to earnings multiple basis at the bottom of the cycle… when you have to be buying them… not throwing them out… you buy because you know that their earnings are going to increase after the economy picks up and you know will never be able to get them so low after we start getting a little steam going…

Here is the bottom line…

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The Bottom Line!:     Take the easy advice… play defense… buy secular growth stocks at the top of the cycle when it looks like that things are about to roll over… and go on the offense with the cyclical stocks when the economy is so bad, that you need to take away the tie and the shoelaces… as long as you believe that things aren’t going to get even worse… have stabilized… and may in the next 3 to 6 months get better.

When times get tough, think secular companies, when times are better, think cyclical companies
 

[verbatim recap]

[end of segment]


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