Q: I have always been puzzled by cyclical stocks. By way of example, I hold NTR in a non-registered account and have ridden it up (by 50%) and now down to 15%. Is the strategy for dealing with these stocks simply to ride out the bad times, knowing they will eventually cycle back? Or should I be selling on the way down and trying to figure out the best entry point when the stock starts to rebound? The matter is complicated, of course, by the tax consequences of selling in a non-registered account. Your advice regarding buying and selling cyclical stocks would be most appreciated. Thank you.
5i Research Answer:
It is tough, of course, as a buy/sell execution is market timing. Rather than a hold/sell/buy call, we would try to adjust portfolio weights. If a weighting is 2%, and times are good, it may rise to 3.5% in a good market. If there are signs of recession (high rates, GDP, etc.) one can then take the position back to 2%. In a downturn, this then might drop to 1.5%, and could be slowly topped back up to 2%. For cyclicals, we would start with a low weighting, as in a rally in will grow, and if one is wrong on timing it will be less painful.