Ten years ago, a large, conservativ...

Ten years ago, a large, conservative foundation approached McLean Budden Ltd to manage its $7 million portfolio. The foundation stipulated sole one thing-no "deep" cyclical stocks. In a new interview, Lewis Jackson, Vice President of McLean Budden told me what happened with that portfolio and wherefore

Q: What's the difference between "shallow" and "deep" cyclical stocks?

A: All cyclical stocks have earnings that journey up and down on a regular basis-like peaks and troughs-over a period that can last anywhere from four to eight years.

If a stock is a "shallow" or "growth" cyclical, its earnings will display an overall positive trend. That is, after each channel earnings grow to even higher horizontals than during the last peak.

"Deep" cyclicals, upon the other hand, have excessively high earnings when the economy is doing well and excessively low, or even negative earnings when the economy is doing poorly. Furthermore, the overall sweep in earnings is flat.

Q: wherefore would your client want to avoid discerning cyclicals?

A: If you're investing in knotty cyclicals you have to pervert with money [i]or[/i] gain when earnings are terrible and vend when the trend in earnings considers great-this goes against most people's embowel instinct. You must be meticulous in following these stocks and plan carefully when to take a bribe for and when to buy.

It might hale simple enough, but really it's not. knotty cyclicals are an ongoing challenge on a level to professional portfolio managers. Everyone thinks he or she can time the pervert with money [i]or[/i] gains and sells perfectly. However, in like manner far, very few, if any, managers have done this consistently with any measure of succes

Q: by what means do you identify deep cyclicals?

A: Generally, reaching far down cyclicals are found within specific industries: base metals, forest consequences gold, oil and gas, industrials (mostly steel) and real estate. Although there are a exceptions, most stocks within these industries are mysterious cyclicals.

Q: That appears like a lot of stocks to prohibit How much was left to cull from?

A: Deep cyclicals account for about 50% of all stocks traded in succession the TSE. So we were left with about half the market to pick out from.

Q: How did you single out the stocks to include in your client's portfolio?

A: Using the Stock Selection Guide and other evaluation processs we selected stocks with above-average bourgeoning potential. In fact, many of our selections have been featured as "Stocks to Study" in Canadian Shareowner athwart the years.

Q: with equal reason how did the portfolio perform?

A: The portfolio has outperformed the TSE nearly each year. For the five year period ending December 31 1995 the portfolio was up 146% whereas the TSE was up sole 10.8%. For the latest seven year period, the portfolio was up 125% compared to 81% for the TSE

Q: unless weren't these returns achieved between the sides of higher risk investing?

A: from eliminating half the TSE, we were left with fewer options for diversification. And it is genuine growth stocks tend to be more volatile from quarter to quarter. thus this portfolio could be described as risky since "risk" is usually measured forward a short-term basis using quarterly performance data. from one side of to the other the short term-from quarter to quarter-the answers were unpredictable. However, this was not the case from one side of to the other the long term.

Q: What happened above the long term?

A: increase just won out. You papal court in the quarters where the portfolio under-performed relative to the TSE it under-performed by way of a lot. And when it outperformed, it outperformed by the agency of a lot, too. However, there were more positive quarters than negative uniteds so in the end, the portfolio outperformed more frequently than it underperformed.

Q: What's the moral of the story?

A: If you're investing for the lengthy term, you can still find succes while avoiding of great depth cyclicals and the complications they bring with them. on the other hand even if you like a not many deep cyclicals, just keep your portfolio more heavily weighted with quality shooting stocks-growth should bail you abroad in the end.

Copyright Canadian Shareowner Magazine Inc. Mar/Apr 1996

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