3 Cyclical Stocks With Room To Rally

​Chris Lau, Kapitall: While the S&P 500 hovers around yearly highs, the risk of losses for bearish investors getting caught in the updraft is rising. Cyclical companies, which can include those in the resource sector, could offer disproportionately higher returns than the market.

[Read more from Kapitall: Hedge Funds Booking 3 Rallying Tourism Stocks as International Travel Soars]

Three companies most heavily shorted on the S&P 500 are:

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Cliffs Natural Resources (CLF)  is up 39.40% this month. The company was thought to be a victim of lower iron ore prices. When Cliffs reported second quarter results that exceeded estimates, shares continued on an upward trend. July may have marked a bottom for shares:

Click on the images below to see data over time. Sourced from Zacks Investment Research.

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Cliffs earned $146 million in profits last quarter, and generated $414 million from operations. Sales for coal also rose 36% in North America. In addition, Cliffs settled its dispute with the labour force at its Bloom Lake mine on August 2, 2013. This reduces uncertainty for at least one of its facilities.

United States Steel (X) has a short float of 30.10%. The stock is stuck in a range that began in April, 2013:

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Future earnings for the firm depend on the price of iron ore, which rose over the last few weeks. Prices for the metal were supported when China restocked its supply of iron ore, while raising steel output. Iron ore was around $133 per ton on August 7, 2013. If iron ore prices hold, shares in United States Steel could find a bottom in the $16 – $19 range.

Joy Global Inc. (JOY) has a short float of 15.40%. In late May, the firm lowered its outlook for the fiscal year. Joy Global said it would earn $5.75 – $5.95 per share, compared to $5.75 – $6.50 per share as previously guided. The outlook was lowered because the firm expected growth for coal demand to be 5%, below the 5-year average of 7%.

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Joy Global shares are stuck in a narrow trading range, similar to United States Steel. If the outlook in China brightens, shares could rally.

Word of Warning

Cyclical stocks could provide tremendous upside relative to the market, but only if global growth and demand for basic materials improves. If the lowered growth rates for China fall even further, these companies could underperform the markets at proportionately higher rates.

 

Written by Chris Lau, Kapitall contributor. All data sourced from Finviz.

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