The Cyclical-Stock Party Is Ending

The important thing to remember is that cyclical stocks are ... well, cyclical. They move up, and they move down. Personally, I like the "up" part the best. Historically, each cycle has lasted around five to seven years, so the clock is running out on this latest cycle, which began in September 2000 just as the tech sector was returning from its romp through Bubblestan.

Another important fact to remember is that cyclicals have a nice habit of outperforming the stock market when the market itself is doing well but underperforming when stocks take a beating.

At the end of 2000, energy and materials combined made up less than 9% of the S&P 500's market value. Since then, the S&P 500 has tacked on close to $2 trillion, and those two sectors now make up 14% of the index. In fact, they're about to overtake tech, which used to be the S&P's largest single sector.

One of the difficulties with investing in cyclicals is that the P/E ratios often don't tell you much. For example, a low P/E can be a sign of a waning cycle, not a bargain price.

Take ConocoPhillips (COP - commentary - Cramer's Take), the jumbo-cap energy stock. There's no doubt it's a great company, and the stock has had a terrific run, but let's look at what lies ahead. Last quarter, COP's earnings came in 8 cents below Wall Street's estimates ($1.82 vs. $1.90). Yet the shares have added nearly $10 since that earnings report. Kind of reminiscent of tech's journey. The stock is currently going for less than 10 times next year's earnings, but I wouldn't go near it. Earnings misses tend to be like cockroaches: There are five more for every one you see.

Even a cyclical standout like Valero (VLO - commentary - Cramer's Take) is going for just eight times trailing earnings. But it's not a cheapie either, once you consider that Wall Street expects Valero's earnings per share to plunge 17% next year.

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At the time of publication, Elfenbein had no positions in stocks mentioned, although positions may change at any time. Eddy Elfenbein runs the financial blog, CrossingWallStreet.com, and has several years of experience in the financial newsletter industry. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Elfenbein appreciates your feedback; click here to send him an email.