This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Cyclical Investing's Countercyclical Payoff: Street Whispers

Stocks in this article: LYBAPODD

NEW YORK ( TheStreet) -- Private equity giant Apollo Global Management's (APO) investment success in chemicals conglomerate LyondellBasell (LYB) shows what big money private equity has discovered and what retail investors have yet to realize: Cyclical stocks can tell you the direction of corporate earnings but that doesn't mean they say anything about valuations.

By looking at chemical giant LyondellBasell's continued recovery from bankruptcy and gains made by its private equity and hedge fund shareholders since an October 2010 initial public offering illustrate that confusion may abound about cyclical stock valuations.

Be it steel manufacturer Alcoa (AA), chemicals giant DuPont (DD) or equipment maker Caterpillar (CAT), cyclical's are rightfully seen by investors as leading indicators for corporate earnings and the overall economy.

But as a read on the direction of stock market valuations, cyclical stocks may be the exact opposite. In fact, a look at the private equity and hedge fund score in LyondellBasell stands as proof of a crucial, but counterintuitive investing dynamic. While Apollo invested in LyondellBasell at peak valuation multiples, it also entered the company as it neared cyclical earnings lows after the onset of the Great Recession.

Now, many expect that the opposite. In fact, after a string of blockbuster earnings quarters in a shaky economy, continued optimism on LyondellBasell's shares hinge on whether its multiple rises as earnings peak.

The counterintuitive interplay between earnings and valuations is the key, after LyondellBasell reported better than expected second quarter earnings in late July. " We continue to believe that at 4.8x our 2013 EBITDA earnings before interest, taxes, depreciation and amortization forecast for the stock is reflecting more peak-like earnings despite the fact that we are below mid-cycle levels that should improve over the coming years," wrote Credit Suisse analyst John McNulty, in a note to clients after LyondellBasell's July 27 earnings.

Apollo's entry point into LyondellBasell came as markets and the global economy turned from a boom to the biggest bust since the Great Depression. Saddled with a $30 billion in debt from a leveraged 2007 merger between Houston-based Lyondell and Basell of the Netherlands, a subsidiary of investing conglomerate Access Industries, the company quickly suffered from downturn and was forced into bankruptcy.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,399.67 +19.26 0.12%
S&P 500 1,904.01 +17.25 0.91%
NASDAQ 4,316.0740 +57.6360 1.35%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs