How You Could Make Money in Both Cyclical and Structural Stocks

Chris Versace

Chris Versace is a financial columnist and equity analyst with more than 20 years of experience in the investment industry.
[happy investor up arrows]

We are two-thirds through the current quarter, and while there are signs it is far stronger than the March quarter, we’re still looking in the rear-view mirror this week. By that, I mean we’ve gotten our second snapshot of how dismal the level of growth was in the first quarter of the year. Remember, economists originally forecasted it would come in near +1.3%, and the initial reading at 0.1% was just above no growth. On May 29, we received our “second look,” which supposedly gives us a clearer picture of the quarter’s economic activity. It came as no surprise the revision painted an ever-darker picture of the economy during the March quarter with its -1% reading.

Now we can get all down and dour looking at that figure, but as I just mentioned, it’s now behind us.

Stock prices have moved up, down or not at all in the first quarter. Companies have reported their revenue and earnings per share (EPS) results for that time period and the stock market has moved on. In other words, the stock market is a forward-looking animal with a view of three to nine months ahead. Sometimes that lens gets a little foggy and sometimes a little jaded, but it usually comes back into focus over a period of time. That’s what’s happening now, as the economic data around the globe paints the picture of a better and improving economy for the current quarter.

Anytime we see a shift from contraction to expansion when it comes to the economy, it means looking at companies whose business models are tied to a pickup in economic activity. One simple example is trucking — as the economy heats up, more goods need to get to more places, plain and simple. While rail is part of the solution, goods need to get to and from rail to or from distribution points, companies and individual homes. I’ve positioned subscribers of my investment newsletter PowerTrend Profits accordingly. There are other examples, from industrial conglomerates like General Electric (GE) to even sensor companies that are seeing their product embedded in more and more industrial and consumer applications.

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Aside from cyclical stocks — those tied to the swings of the economy — another investment strategy is to look for those structural shifts, be it in technology, manufacturing process, materials or some other facet that disrupts the way a business operates and competes. Some great examples have been mobile, the Internet and social media, which have made for great investments for PowerTrend Profits subscribers in 2013 and 2014.

Rather than have cyclical or structural investments, the prudent strategy is to have a combination of both in your portfolio, and that’s exactly how PowerTrend Profits subscribers are positioned. We’ve even got several defensive plays, as well as a few of what I call dividend dynamos — companies that increase their dividends year in, year out, no matter what is going on in the economy. Buying one or two stocks is easy, but when building a full portfolio, you need to have complimentary and opposing strategies at play to minimize risk and maximize your profit potential.

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