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Value investing is about finding opportunities to buy stocks when they’re cheap. One way of doing this is by paying attention to where companies are in their business cycles.
Most businesses have ups and downs and this is entirely normal. But share prices can sometimes over-react – especially to downturns – and this can provide chances to grab a bargain.
Cyclicality
Some businesses are more prone to cyclical fluctuations than others. Construction firms like Taylor Wimpey, for example, do better when the economy is strong than when things are tough.
Difficult times for the business, though, can present opportunities for investors. Back in July, the stock was trading under £1 as interest rates seemed destined to go higher for a while.
Since August, though, the Bank of England has elected to hold rates fixed. And the resulting surge of optimism has sent the Taylor Wimpey share price up to £1.33.
Not all industries are as volatile as housebuilding, but few are entirely immune. And there are some companies at a point in the cycle where I think they look like good investments right now.
Croda International
Right now, I think Croda International (LSE:CRDA) is close to a cyclical low. The company’s pre-tax profit is expected to drop from £440m to around £300m.
As I see it, this is the result of short-term issues, rather than long-term problems. I think there’s significant growth around the corner, which should help push the stock higher.
The company sells lipids to vaccine manufacturers. This enjoyed a boost during Covid-19, but things have turned down sharply as excess customer inventory has caused demand to fall off.
The danger here is that the slump in demand might last longer than expected. If that happens, shareholders might have to put up with lower earnings for some time.
For investors who are prepared to be patient, though, this looks like a good opportunity. With the stock starting to recover from a five-year low, I think this could be a good time to buy.
Forterra
Another company close to a low point in its business cycle is brick manufacturer Forterra (LSE:FORT). Like Croda, the stock has recently started to rebound off a 52-week low.
Over the long term, I expect the business to benefit from a structural shortage of housing in the UK. But there have been a couple of issues for the firm to contend with recently.
One of these is inflation, which has been putting pressure on margins recently. While this has showed signs of easing up, if it turns out to be a temporary reprieve, the stock could go lower.
If that happens, though, I’m happy to keep buying the stock at lower prices. I expect the company to do well over the long term, so I’m happy to buy as many shares as I can before the price rallies.
The way I see it, I’ll likely look at the Forterra share price in the future and wish it was cheaper. So I’m going to take advantage now while I have the chance.
