With Cyclicals, Price Increases Matter Most

You have to keep track of cyclical companies' price increases if you are going to trade their stocks, Cramer says.
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The Net, along with tech in general, trades on product introductions and cycles.

That's

not

how cyclicals trade at all. You've got to get with the beat when it comes to cyclicals. They trade off of price increases.

Let's take industrial gas stocks. BO-RRINNNNGGGG! I own some of these and was heartened to see a price increase being put through by these companies recently. You need that increase to maintain the momentum.

You have to keep track of these price increases if you are going to trade these things. You also have to keep track of whether the price increases are sticking. That's tougher. You have to read trade publications and stay close to what analysts are saying. I know -- a real pain in the butt.

There is no other way, however, of tracking these companies because the momentum of their earnings is totally dependent on these price increases. If you get them, the numbers are too low. If the price increases don't stick, the numbers get cut.

In the cyclical heyday after the market crash, I used to get all fired up about methane increases and linerboard plant shutdowns, not to mention ethylene outages. Anything that makes supply tight or indicates demand is strong -- that's what price increases do -- makes you money.

Oh yeah, unlike growth stocks, there are two decisions involved with owning cyclicals: when to buy and when to sell. (Of course I am being facetious, you graybeards, as I know that there are two decisions to every stock.) You have to monitor price increases to understand the upside surprises and understand the multiple and how

low

it goes.

I will be there with you on this stuff. Amazingly, I cannot tell you which cyclicals to buy, not only because I am not your broker, but also because the float on some of these big industrial companies is so small that I will impact the stocks. So, like small-caps, it's strictly a National Gift Wrap & Linerboard Co. exercise.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in the stocks mentioned, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

letters@thestreet.com.