Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's Bryan Ashenberg will appear on NBR Tuesday (check local listings) to discuss breakout stocks ready to benefit from cyclical recoveries in their industries.
Playing cyclical recoveries can lead to profitable investments -- but it's all about the timing.
If one enters the trade too early, the investment can languish at best; more likely, it will deteriorate. However, for investors who can catch the cyclical wave as it begins to rise, the profits can be sizeable.
Typically, when an industry experiences a downturn, the companies that operate in that area are forced to rationalize their businesses and adjust to the lower level of demand. By the time the cycle begins to reaccelerate, those companies are running "mean and lean" businesses, which creates an optimal environment for margin expansion as volumes return. The margin expansion occurs on top of depressed earnings levels, and this creates a sort of turbo boost to earnings as the businesses recover.
Today, we are looking at three of TheStreet's Breakout Stocks model portfolio holdings and how they are positioned to benefit from cyclical recoveries in their respective end markets.First up is BE Aerospace (BEAV), which is a leading manufacturer of cabin interiors for both commercial aircraft and smaller planes through its business jet unit as well as a top distributor of aerospace fasteners and consumables. The company stands to benefit from a greater amount of business as airlines add capacity and increase their spending on fleet maintenance due to upticks in airline traffic and passenger utilization. Next, Navistar (NAV) is a leading manufacturer of commercial trucks, buses and military vehicles. The company cut costs during the recent period of macroeconomic weakness and is now the purest play in the North American truck market recovery cycle. Its current fleet of Class 8 trucks (which account for a big portion of Navistar's business) is the oldest on record, and recent order data have shown that demand has begun to revive. Last, WMS Industries (WMS) makes slot machines. The company is set to benefit from three strong growth drivers: (1) a turnaround in the larger casinos' material underinvestment in the replacement of slot machines for their casino floors, (2) a potential escalation in momentum among state legislators looking to fund budget gaps by increasing the number of gaming sites, or, in certain states, legalizing gambling, and (3) growing international sales opportunities. WMS continues to perform well in a difficult demand environment and the company is on track to be even more productive in healthy end-markets.
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