This Day On The Street
Continue to site right-arrow
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
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Cyclical Investing's Countercyclical Payoff: Street Whispers

Stocks in this article: LYB APO DD

When making an initially mistimed 2008 investment in LyondellBasell's debt and a subsequent push for equity control in its 2009 bankruptcy, Apollo faced an investment in a company with negative earnings and cash flow that made it expensive on classic valuation multiples.

But when projecting LyondellBasell's future earnings or by studying its trailing results, Apollo likely saw a bargain-priced company in 2008 and 2009. Now, if ordinary investors see the company's current low earnings multiples as a similar bargain they are misguided.

Credit Suisse's McNulty makes the argument that while the company's valuation of less than five times EBITDA looks like a cyclical low, that's only because earnings are churning at a cyclical high. In his continued optimism on LyondellBasell shares, which have gained nearly 50% in 2012, the analyst makes the point that if earnings have topped out, he expects valuations haven't.

For instance, while McNulty recently cut his estimate of 2013 and 2014 earnings, implicit in his 'Buy' recommendation of LyondellBasell shares is a rise in the company's earnings multiple.

In this counterintuitive investing dynamic no one has more at stake than Apollo.

Apollo's near 30% stake in LyondellBasell is worth roughly $9 billion and it comprises almost half of the private equity firm's largest fund. Meanwhile, the fund's 33% investment gain, driven by its LyondellBasell investment, accounts for nearly 20% of the firm's total investing profits over its 20-year plus history, according to its latest earnings.

Other large LyondellBasell shareholders include private equity fund Access Industries, which maintained a 14% stake in the company after ceding control of it to Apollo in bankruptcy. Hedge fund investors Viking Global Management and Ares Management own roughly $500 million of the company's stock.

Apollo's investment in LyondellBasell spans a complicated Wall Street saga that includes a leveraged buyout and an industry-rattling bankruptcy -- but the firm's investment success boils down to properly understanding the interplay between cyclical earnings and valuations. That has a strong relevance to the ordinary investor.

-- Written by Antoine Gara in New York

2 of 2

Select the service that is right for you!

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 17,626.39 +269.52 1.55%
S&P 500 2,042.83 +29.94 1.49%
NASDAQ 4,717.1990 +72.8870 1.57%

Brokerage Partners

Rates from

  • 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