Look at the long term and be aware of stocks that dip as the business cycle dips.

Always be wary of cyclical stocks.

True, companies may look irresistable with low PE and high short-term sales and earnings growth rates.

But a closer look at the long term reveals a PE in the teens and years of marginal earnings or even losses mixed in.

Look at the long term and be aware of stocks that dip as the business cycle dips.

Basic industries, such as capital equipment, natural resources, paper, farm mchinery, automobiles, and auto suppliers, are notorious for sending signals of intermittent strength while showing little in the way of sustained growth.

The recent tanking of homebuilding stocks is an extreme case in point. It is amazing how many short-term-oriented investors bit on the apparent "value" in this sector.

Also read:

Is the Firm Cyclical?
For cyclical stocks, your best bet is to look at the most recent cyclical peak, make a judgment whether the next peak is likely to be lower or higher than the last one, and calculate a P/E based on the current price relative to what you think earnings per share will be at the next peak.

The expanding P/E in cyclical stocks
Here’s the rub about cyclical stocks: Their valuations are counterintuitive. In other words, you should be looking at cyclical stocks as their P/Es expand, not shrink.

Recognizing Value Situations - Cyclical Plays
Generally, cyclical companies shouldn't be confused with value investments. Growth, although apparent in the short term, usually isn't sustainable. If a company seems cheap and has something new in its portfolio to avoid cyclical price and earnings behaviour, it may be worth a look.