The 3 Killer Cs - Cyclical, Capital-intensive and Commoditised

"The 3 Killer Cs"

Not one but three 'killer Cs' lurk around the darkest corners of the business world. 

If any one of them grips a business, it makes life hell for the managers and profits elusive for the owners. What are they? 

The first is 'cyclical'. 

• When a business is cyclical, it sees large and unpredictable swings in its revenues, margins, and profits. Everything that matters is all over the place. 

The second is 'capital-intensive'. 

• Businesses afflicted by high capital-intensity require a lot to produce little. They s u  c k investors dry as they need large amounts of capital to make profits. 

The third is 'commoditised'. 

• Companies here can do very little to prove to customers that their product or service is better than their competitor's. 

The presence of even one of these killer Cs is bad news for a business. 

Valuing Cyclical Companies

A cyclical company is one whose earnings demonstrate a repeating pattern of increases and decreases.

The earnings of such companies fluctuate because of large

• changes in the prices of their products or 
• changes in volume.

Volatile earnings introduce additional complexity into the valuation process, as historical performance must be assessed in the context of the cycle.


The share prices of companies with cyclical earnings tend to be more volatile than those of less cyclical companies.

However their discounted cash flow (DCF) valuations are much more stable.



Why are the share prices of cyclical companies more volatile?

Earnings forecasts may be the reason that the former is more volatile than the latter.

Analysts' projections of the profits of cyclical companies are not very accurate, in that they tend not to forecast the downturns and generally have positive biases.

Analysts may produce biased forecasts for these cyclical firms from fear of retaliation from the managers of the firms they analyse.

The behaviour of the managers may play a role in the cyclicality.

They tend to increase and decrease investments at the same time (i.e., exhibit herd behaviour).

Three explanations for this behaviour are:

• cash is generally more available when prices are high,
• it is easier to get approval from boards of directors for investments when profits are high, and 
• executives get concerned about the possibilities of rivals growing faster than their firms.

An approach for evaluating a cyclical firm

The following steps outline one approach for evaluating a cyclical firm:

• construct and value the normal cycle scenario using information about past cycles;
• construct and value a new trend line scenario based on the recent performance of the company;
• develop the economic rationale for each of the two scenarios, considering factors such as demand growth, companies entering or exiting the industry, and technology changes that will affect the balance of supply and demand; and 
• assign probabilities to the scenarios and calculate their weighted values.

KESM 7.6.2016

KESM Charts

Cyclical business

PE has expanded and contracted over the years.

Revenue growth is anaemic.

PBT and EPS have grown fast recently due to margin expansions for various reasons.

Its price was below RM 1 in recent years and has climbed to 6 before dropping to present levels recently.


Best time to be enthusiastic on cyclical stocks:


1.  When their PE is the highest in the cycle

2.  When their profit margins are the lowest in the cycle.

The company has about 50 m debts but is net cash positive.

Large capital expenditure expended last year.  

ROE is improving, was a single digit and now about 12%.

Its dividend is minuscule, DPO is about 15%.

DY at its present high price of 4.90 is about 1.6%.

Equity Investments - Analyzing a Company - Types of Stock

1. Growth Company and Growth StockA growth company is a company that consistently grows by investing in projects that will generate growth. A growth stock, however, is a stock that earns a higher rate of return over stocks with a similar risk profile.
   
   Feasibly, a company could be a growth company, but its stock could be a value stock if it is trading below its peers of similar risk.

2. Defensive Company and Defensive StockA defensive company is a company whose earnings are relatively unaffected in a business cycle downturn. A defensive company is typically reflective of products that we "need" versus "want". A food company, such as Kellogg, is considered a defensive company. A defensive stock, however, will hold its value relatively well in a business cycle downturn.

3. Cyclical Company and Cyclical StockA cyclical company is a company whose earnings are affected relative to a business cycle. A cyclical company is typically reflects products we "want". A retail store, such as The Gap, is considered a cyclical company. A cyclical stock, however, will move with the market in relation to the business cycle.

4. Speculative Company and Speculative Stock.A speculative company is a company that invests in a business with an uncertain outcome. An oil exploration company is an example of a speculative company. A speculative stock, however, is a stock that has potential for a large return, as well as the potential for considerable losses. An example of speculative stocks can be found in the tech bubble, where investors put money into speculative stocks, but the investor could have been hurt financially or made large gains depending on the stock the investor invested in.

Read more: http://www.investopedia.com/exam-guide/cfa-level-1/equity-investments/analyzing-companies-stock-types.asp#ixzz1yf8SKSRC

If you are investing for long term, try to avoid cyclical stocks. But, it is ok to trade these stocks.

Acknowledge its Industry Nature

Companies have its own business cycle. This especially true to cyclical stocks. Businesses like housing properties, airlines or automobiles are more susceptible to the overall economy.

When the economy is riding the bull market, customers tend to spend more on luxuries thingy like cars, housing and holidays to overseas. But when economy experience slight downturn, people are more likely to avoid spending on the luxury things. 

Just imagine, when more employees been laid off and higher cost of living (as effect of inflationary pressures), buying new homes or brand new cars are most probably the last things in their mind. Struggling their lives through the turbulence time thought them how important cash saving is. If you are investing for long term, try to avoid this type of stock. But, it is ok to trade these stocks.

How to decide what shares to buy?

How to decide what to buy?

When it comes to deciding what shares to buy, the most important thing to consider is your investment goals, in particular, the performance goals you set for the share investments portion of your portfolio.

For example, you might be aiming to achieve an average after-tax dividend yield of 4% p.a. and capital growth of 8% p.a. over the next 10 years.  In that case, you could buy some shares that provide reliable, tax-effective dividends and the expectation of solid year-on-year growth.

Alongside long term investing, there are share trading opportunities that offer the chance to grow your investment capital more quickly.  Active or daily trading carries with it certain risks that need to be considered carefully.  With this in mind, looking at the range of categories that shares fall into can be a useful place to start.

(Long term investors aim to capture an upward trend in market value.  Short term investors try to capture value from the volatility in the share market.)

Income shares - Pay larger dividends, compared to other types of shares, that can be used to generate income without selling the shares, but the share price generally does not rise very quickly.

Blue chip shares - Issued by companies with long histories of growth and stability.  Blue chip shares usually pay regular dividends and generally maintain a fairly steady price trend.

Growth shares -  Issued by entrepreneurial companies experiencing a faster rate of growth than their general industries.  These shares normally pay little or no dividends because the company needs most or all of its earnings to finance expansion.

Cyclical shares -  Issued by companies that are affected by general economic trends.  The share prices tend to fall during periods of economic recession and rise during economic booms.  For example, mining, heavy machinery, and home building companies.

Defensive shares -  The opposite of cyclical shares.  Companies producing staples such as food, beverages, pharmaceuticals and insurance issue defensive shares.  They typically maintain their value during economic downturns.


http://www.asx.com.au/courses/shares/course_01/index.html?shares_course_01

Characteristics of Commodity and Cyclical companies and their Value Drivers.

Characteristics of commodity and cyclical companies

            While commodity companies can range the spectrum from food grains to precious metals and cyclical firms can be in diverse business, they do share some common factors that can affect both how we view them and the values we assign to them.

1. The Economic/Commodity price cycle: Cyclical companies are at the mercy of the economic cycle. While it is true that good management and the right strategic and business choices can make some cyclical firms less exposed to movements in the economy, the odds are high that all cyclical companies will see revenues decrease in the face of a significant economic downturn. Unlike firms in many other businesses, commodity companies are, for the most part, price takers. In other words, even the largest oil companies have to sell their output at the prevailing market price. Not surprisingly, the revenues of commodity companies will be heavily impacted by the commodity price. In fact, as commodity companies mature and output levels off, almost all of the variance in revenues can be traced to where we are in the commodity price cycle. When commodity prices are on the upswing, all companies that produce that commodity benefit, whereas during a downturn, even the best companies in the business will see the effects on operations.
2. Volatile earnings and cash flows: The volatility in revenues at cyclical and commodity companies will be magnified at the operating income level because these companies tend to have high operating leverage (high fixed costs). Thus, commodity companies may have to keep mines (mining), reserves (oil) and fields (agricultural) operating even during low points in price cycles, because the costs of shutting down and reopening operations can be prohibitive.
3. Volatility in earnings flows into volatility in equity values and debt ratios: While this does not have to apply for all cyclical and commodity companies, the large infrastructure investments that are needed to get these firms started has led many of them to be significant users of debt financing. Thus, the volatility in operating income that we referenced earlier, manifests itself in even greater swing in net income.
4. Even the healthiest firms can be put at risk if macro move is very negative: Building on the theme that cyclical and commodity companies are exposed to cyclical risk over which they have little control and that this risk can be magnified as we move down the income statement, resulting in high volatility in net income, even for the healthiest and most mature firms in the sector, it is easy to see why we have to be more concerned about distress and survival with cyclical and commodity firms than with most others. An extended economic downturn or a lengthy phase of low commodity prices can put most of these companies at risk.
5. Finite resources: With commodity companies, there is one final shared characteristic. There is a finite quantity of natural resources on the planet; if oil prices increase, we can explore for more oil but we cannot create oil. When valuing commodity companies, this will not only play a role in what our forecasts of future commodity prices will be but may also operate as a constraint on our normal practice of assuming perpetual growth (in our terminal value computations).

In summary, then, when valuing commodity and cyclical companies, we have to grapple with the consequences of economic and commodity price cycles and how shifts in these cycles will affect revenues and earnings. We also have to come up with ways of dealing with the possibility of distress, induced not by bad management decisions or firm specific choices, but by macro economic forces.

Commodity and Cyclical companies: Value Drivers

Normalized Earnings

If we accept the proposition that normalized earnings and cash flows have a subjective component to them, we can begin to lay out procedures for estimating them for individual companies. With cyclical companies, there are usually three standard techniques that are employed for normalizing earnings and cash flows:

1.     Absolute average over time: The most common approach used to normalize numbers is to average them over time, though over what period remains in dispute. At least in theory, the averaging should occur over a period long enough to cover an entire cycle. In chapter 8, we noted that economic cycles, even in mature economies like the United States, can range from short periods (2-3 years) to very long ones (more than 10 years). The advantage of the approach is its simplicity. The disadvantage is that the use of absolute numbers over time can lead to normalized values being misestimated for any firm that changed its size over the normalization period.  In other words, using the average earnings over the last 5 years as the normalized earnings for a firm that doubled its revenues over that period will understate the true earnings.

2.     Relative average over time: A simple solution to the scaling problem is to compute averages for a scaled version of the variable over time. In effect, we can average profit margins over time, instead of net profits, and apply the average profit margin to revenues in the most recent period to estimate normalized earnings. We can employ the same tactics with capital expenditures and working capital, by looking at ratios of revenue or book capital over time, rather than the absolute values.

3.     Sector averages: In the first two approaches to normalization, we are dependent upon the company having a long history. For cyclical firms with limited history or a history of operating changes, it may make more sense to look at sector averages to normalize. Thus, we will compute operating margins for all steel companies across the cycle and use the average margin to estimate operating income for an individual steel company. The biggest advantage of the approach is that sector margins tend to be less volatile than individual company margins, but this approach will also fail to incorporate the characteristics (operating efficiencies or inefficiencies) that may lead a firm to be different from the rest of the sector.

Normalized commodity prices

            What is a normalized price for oil? Or gold? There are two ways of answering this question.

1.     One is to look at history. Commodities have a long trading history and we can use the historical price data to come up with an average, which we can then adjust for inflation. Implicitly, we are assuming that the average inflation-adjusted price over a long period of history is the best estimate of the normalized price.

2.     The other approach is more complicated. Since the price of a commodity is a function of demand and supply for that commodity, we can assess (or at least try to assess the determinants of that demand and supply) and try to come up with an intrinsic value for the commodity.

Once we have normalized the price of the commodity, we can then assess what the revenues, earnings and cashflows would have been for the company being valued at that normalized price. With revenues and earnings, this may just require multiplying the number of units sold at the normalized price and making reasonable assumptions about costs. With reinvestment and cost of financing, it will require some subjective judgments on how much (if any) the reinvestment and cost of funding numbers would have changed at the normalized price.

            Using a normalized commodity price to value a commodity company does expose us to the critique that the valuations we obtain will reflect our commodity price views as much as they do our views on the company. For instance, assume that the current oil price is $45 and that we use a normalized oil price of $100 to value an oil company. We are likely to find the company to be undervalued, simply because of our view about the normalized oil price. If we want to remove our views of commodity prices from valuations of commodity companies, the safest way to do this is to use market-based prices for the commodity in our forecasts. Since most commodities have forward and futures markets, we can use the prices for these markets to estimate cash flows in the next few years. For an oil company, then, we will use today's oil prices to estimate cash flows for the current year and the expected oil prices (from the forward and futures markets) to estimate expected cash flows in future periods. The advantage of this approach is that it comes with a built-in mechanism for hedging against commodity price risk. An investor who believes that a company is under valued but is shaky on what will happen to commodity prices in the future can buy stock in the company and sell oil price futures to protect herself against adverse price movements.

Little Book of Valuation

Aswath Damodaran

A Brief Look at Tongher

2003 EPS 16.2 DPS 5.3
2004 EPS 35.4 DPS 14.0
2005 EPS 23.4 DPS 12.1
2006 EPS 43.7 DPS 13.0
2007 EPS 51.0 DPS 10.2
2008 EPS 14.4 DPS 13.9
2009 EPS 6.60 DPS 5.00
9M10 EPS 14.50 DPS 5.00

Price RM 2.73 (7.1.2011)
Estimated EPS for 2011 14.50*4/3 = 19.33
Projected PE for 2011 = 14.1 x

Historical
5 Yr
PE 10.7 - 17.4
DY% 5.8 - 3.1

10 Yr
PE 9.0 - 15.1
DY% 6.6 - 3.7

Capital Change

2007 1/2 Bonus

Comment:

Tongher is a cyclical stock.  Given the cyclical business that it is in, its share price has fluctuated wildly largely determined by its business cycle and the challenging environment.  It's share price has gone down a lot during the recent global financial crisis due to poor profits.  Its latest NTA per share was RM 2.29.

Since the company has remained profitable, its assets are generating profits and its balance sheet is not harmed or eaten away by toxic assets.  One can expect its profits to normalise and also its new investments to generate additional summative profits given time.

The high PE of Tongher during the early part of the global financial crisis was due to the fact that its profits fell faster than its share price.  With its profits recovering, its high PE is contracting, as its profits are growing at a faster rate than its share price.


Those holding this stock can expect to see real upside in the share price of Tongher over time.


Related:

Are Cyclical stocks also Value stocks? Value stocks usually earn money, turnaround stocks may not.

Are Cyclical stocks also Value stocks? Value stocks usually earn money, turnaround stocks may not.

What are the characteristics of value stocks?

1. True value investors only buy if a stock is trading substantially below its tangible book value.  It’s hard finding these types of situations in all your investments.  Use this as a guide and not as a “must have.” Over the years, you will have noticed these types of values in the banking, energy and chemical industries, among others.
2. Another factor you need to find in a value stock is a low price to earnings (“P/E”) ratio.  You are looking for a beaten down stock in an out-of-favor industry. A nice P/E discount is 20% to 50% of the industry average over a few years. You then have the potential to make a nice return on both the natural rotation of the industry to a higher timeliness, as well as the stock regaining market favor. 

When is a cyclical stock also a value stock?


Many investors view cyclical stocks as value stocks. Cyclical stocks are value stocks only if they sell at an earnings (P/E) discount to their peers and meet the book value criteria as mentioned above. 




When is a cyclical stock not value stocks but a turnaround stock?


If the company is selling at a discount to its tangible bookvalue, but its earnings have disappeared, it becomes a possible turnaround situation and not a value stock.

Tongher

Date announced 17/08/2010
Quarter 30/06/2010 Qtr 2
FYE 31/12/2010

STOCK TONGHER
C0DE  5010 

Price $ 1.91
Curr. PE (ttm-Eps) 12.41
Curr. DY 2.62%

Rec. qRev 63560 q-q % chg 8% y-y% chq 42%
Rec qPbt 10015 q-q % chg 76% y-y% chq 2529%
Rec. qEps 4.98 q-q % chg 69% y-y% chq -832%
ttm-Eps 15.39 q-q % chg 58% y-y% chq -2%

Using VERY CONSERVATIVE ESTIMATES:
EPS GR 4%
Avg.H PE 10.00
Avg. L PE 4.00

Current price is at Upper 1/3 of valuation zone.
RISK: Upside -17% Downside 117%
One Year Appreciation Potential 0% Avg. yield 3% Avg.
Total Annual Potential Return (over next 5 years):    3%

CPE/SPE 1.77
P/NTA 0.86
NTA 2.23
SPE 7.00
Rational Pr 1.08


Decision:
Already Owned: Buy Hold Sell Filed
Review (future acq) Filed
Discard Filed
Guide: Valuation zones Lower 1/3 Buy Mid. 1/3 Maybe Upper 1/3 Sell

Aim:
To Buy a bargain. Buy at Lower 1/3 of Valuation Zone
To Minimise risk of Loss. Buy when risk is low i.e UPSIDE GAIN > 75% OR DOWNSIDE RISK <25%
To Double every 5 years. Seek for POTENTIAL RETURN of > 15%.
To Prevent Loss Sell immediately when fundamentals deteriorate
To Maximise Gain & Reduce Loss Sell when CPE/SPE > 1.5, when in Upper 1/3 of Valuation Zone & Returns < 15%/yr


How to value a cyclical stock, like Tongher?

A reasonable method is using the asset valuation method.  Tongher is trading below its NTA.

It is more challenging to use earnings to value cyclical stocks.  Tongher's earnings are affected by the business cycle of its sector.  I have averaged all the existing ttm-EPS figures that I have over the last 26 quarters and this gives an average ttm-EPS of 27.3 sen.  Before the recent global crisis, Tongher was earning about 15 sen per quarter.  It's latest quarter's EPS was 4.98 sen.

Using a conservative estimated ttm-EPS 30.0 sen and the signature PE of 7, I derive a rational value for Tongher of 2.10.  As this value will be on the low side due to the very conservative assumptions made in its derivation, at its current price of 1.91, Tongher is undervalued.


Date announced 17/08/2010
Quarter 30/06/2010 Qtr 2
FYE 31/12/2010

STOCK TONGHER
C0DE  5010 

Price $ 1.91
Curr. PE (ttm-Eps) 6.37
Curr. DY 2.62%

Valuation using Estimated ttm-EPS
ttm-Eps 30.00 sen

Using VERY CONSERVATIVE ESTIMATES:
EPS GR 4%
Avg.H PE 10.00
Avg. L PE 4.00

Current price is at Lower 1/3 of valuation zone.
RISK: Upside 87% Downside 13%
One Year Appreciation Potential 18% Avg. yield 6%
Avg. Total Annual Potential Return (over next 5 years):     24%

CPE/SPE 0.91
P/NTA 0.86
NTA 2.23
SPE 7.00
Rational Pr 2.10

Cyclical Versus Non-Cyclical Stocks

Charting a Cyclical vs. Non-Cyclical Company 
Below is a chart showing the performance of a highly cyclical company, the Ford Motor Co. (blue line), and a classic non-cyclical company, Florida Public Utilities Co. (red line). This chart clearly demonstrates how each company's share price reacts to downturns in the economy. 



Notice that the downturn in the economy from 2000 to 2002 drastically reduced Ford's share price, whereas the growth of Florida Public Utilities' share price hardly batted an eye at the slowdown. 


http://www.investopedia.com/articles/00/082800.asp

Know this chart and you will understand the challenge of investing into cyclical stocks.

Investors cannot control the cycles of the economy, but they can adjust their investing practices with its ebbs and flows. Adjusting to economic transitions requires an understanding of how industries are characterized by their relationship to the economy. It's important for you to know the fundamental difference between cyclical and non-cyclical companies so that you can distinguish between sectors that are affected by economic changes and those that are more immune. 

The longer you have to wait and the less certain you are that you'll eventually receive a set of cash flows, the less they are worth to you today.

Cyclicality

Is the firm in a cyclical industry (such as commodities or automobiles) or a stable industry (such as breakfast cereal or beer)? Because the cash flows of cyclical firms are much tougher to forecast than stable firms, their level of risk increases.

Be cyclically aware and responsive.

This means 

• a) monitoring the progress of the economic cycle, using the 3-phase, 7-waypoint cyclical model I developed and have been using in my Cyclical Investingnewsletters for the past 24 years, and 
• b) allocating assets profitably in relation to the current state of the economic cycle, owning those assets supported by economic forces at the time, and avoiding those likely to be depressed by them. 

http://www.cyclical-investing.com/

Watch Out: The Cyclical Stocks Are Trading At An Extreme, And This Could Portend Trouble

Watch Out: The Cyclical Stocks Are Trading At An Extreme, And This Could Portend Trouble
Eddy Elfenbein | Apr. 21, 2010, 5:31 PM

One of the quick-and-dirty metrics I like to look at is the Morgan Stanley Cyclical Index (^CYC) divided by the S&P 500 (^SPX). The Cyclical Index is composed on stocks that are closely tied to the economic cyclical. This means industries like autos, chemicals and mining.

When we divided these two indexes, we can tell if cyclicals are outperforming or underperforming. The thing about cyclicals is that they, well, move in cycles. Check out the chart below:

As you can see, there’s historically been a consistent up-and-down wave that averages a few years. This usually, but not always, corresponds with how well the economy is doing. Investors favor cyclicals during the good times, and flee them during the rough patches.

I urge you not to place too much faith in this metric, but I want to show you that the market does, in fact, move in cycles. These are powerful and once the market is locked it, the cycle can last for some time. Therefore it’s important for us to understand where we are in a cycle.

On top of that, the cycle has a double-whammy effect since the market generally does much better when cyclicals are outperforming, meaning they’re outperforming a market that’s already doing well (note the bottoms in 1982, 1990 and March 2009).

You can really see how the last 18 months have dramatically impacted cyclicals. The ratio held up fairly well until September 17, 2009. Within six months, that ratio dropped from 0.7 to 0.42. The Cyclical Index dropped from 871 on September 19 to 283 by March 9. Youch, that’s a staggering loss so you can see that the non-cyclicals provided some shelter from the storm (though not as good as cash).

But once the ratio hit bottom, cyclicals put on an explosive rally. Although the Cyclical Index is still well-below its high from 2007, the ratio has surpassed its high and has gone on to make several all-time highs. That’s about the shortest cycle I’ve ever seen. In fact, it was more like a panic mini-cycle. Last Thursday (pre-Fab), the ratio made its most recent all-time high of 0.786.

Picking cycle peaks is a tricky business and I won’t attempt to do so now, but I’m on the lookout for a harsh drop off in the Cyclical Ratio. Once it gets going, it could down, down, down for a few years.


Read more: http://www.businessinsider.com/morgan-stanleys-cyclical-index-is-much-higher-than-normal-2010-4#ixzz0uHxXiKpl

Cyclicals versus Non-Cyclicals

The Value of Stock

The Value of Stock
A stock's value can change at any moment, depending on market conditions, investor perceptions, or a host of other issues.

A stock doesn't have a fixed price, or value. When investors are buying the stock, the price tends to go up. But if they think the company's outlook is poor, or if the overall market is weak, they either don't invest or sell shares they already own. Then the price of the stock tends to fall.

But price isn't only one way to measure a stock's value. Return on investment — the amount you earn by owning the stock — is another. To assess return, you add any increase or decrease in price from the time of purchase and any dividends the stock has paid over that time. Then you divide by the amount you invested to find percent return. As a final step, you can find the annualized return by dividing the return by the number of years you owned the stock.

THE BLUES AT BIGCO.
The peaks and valleys in the price of a stock dramatically illustrate how value changes. 

Year 2 Usually a stock climbs in price when the overall stock market is strong, the company's products or services are in demand, and its earnings are rising. When the three factors occur together, the increase can be rapid.

Year 4 A stock's price may change dramatically within a few days, or a pattern of gradual gains or losses may continue over a month or a year. A price is most likely to drop when the market is weak, a competitor introduces a new product, or earnings slow or decline.

Year 5 Nothing ultimately dictates the highest price a stock can sell for. As long as people are willing to pay more for it, it will climb in value. But when investors unload shares or the market falls, prices can drop rapidly.

Years 7 to 10 Following a price collapse, a stock can recoup its value or continue to decline, depending on its internal strength and what the markets are doing. In this example, the price moved up and down for several years at about $100, the level it had reached several years before.

Year 12 If a company is out of favor with its shareholders, has serious management problems, or is losing ground to competitors, its value can collapse quickly even if the rest of the market is highly valued. That's what happened here.

Year 14 However, strong companies can cope with dramatic loss of value and can rebound if internal changes and external conditions create the right environment and investors respond with renewed interest.

CYCLICAL STOCKS 
All stocks don't act alike. One difference is how closely a company's business is tied to the condition of the economy. Cyclical stocks are shares of companies that respond predictably to the economy's ups and downs. When things slow down, their earnings typically fall, and so does their stock price. But when the economy recovers, earnings rise and the stock price goes up. Airline and hotel stocks are typically cyclical: People tend to cut back on travel when the economy is slow. In contrast, stock prices for companies that provide necessary services and staples, such as food and utilities, tend to stay fairly stable.

Stocks that pay dividends regularly are known as INCOME STOCKS,  while those that pay little or no dividend while reinvesting their profit are known as  GROWTH STOCKS

GETTING THE TIMING RIGHT 
The trick to making money, of course, is to buy a stock before others want it and sell before they decide to unload. Getting the timing right means you have to pay attention to:

• The rate at which the company's earnings are growing
• Competitiveness of its products or services
• The availability of new markets
• Management strengths and weaknesses
• The overall economic environment in which the company operates

BETTING WITH THE ODDS 
Investing may be a bit of a gamble, but it's not like betting on horses. A long shot can always win the race even if everyone bets the favorite. In the stock market, the betting itself influences the outcome. If lots of investors bet on Atlas stock, Atlas's price will go up. The stock becomes more valuable because investors want it. The reverse is also true: If investors sell Zenon stock, it will fall in value. The more it falls, the more investors will sell. 

If you're buying stocks for the quarterly income, you can figure out the dividend yield — the percentage of purchase price you get back through dividends each year. For example, if you buy stock for $100 a share and receive $2 per share, the stock has a dividend yield of 2%. But if you get $2 per share on stock you buy for $50 a share, your yield would be 4% ($2 ÷ $50 = 0.04, or 4%).
Purchase Price	Annual Dividend	Yield
$100	$2	2%
$ 50	$2	4%

MAKING MONEY WITH STOCKS You may make money with stocks by selling your shares for more than you paid for them or by collecting dividends on the stocks — or both.
The profit you make on the sale of stock is known as a capital gain. Of course, it doesn't all go into your pocket. You owe taxes on the gain as well as a commission on the sale, but if you've owned the stock for more than a year, it's a long-term gain. That means you pay the tax at a lower rate — sometimes substantially lower — than you pay on your earned income or on interest income.
Dividends are the portion of the company's profit paid out to its shareholders. A company's board of directors decides how large a dividend the company will pay, or whether it will pay one at all. Typically, large, mature companies pay dividends, while smaller ones tend to reinvest their profits to fund growth. From your perspective, one of the advantages of dividend income is that through 2010 qualified dividends are taxed at your long-term capital gains rate — 15% if your marginal tax rate is 25% or higher and 0% if it's 10% or 15%.

Most dividends paid by US corporations are qualified, as are dividends paid by a number of international firms. So is most dividend income that mutual funds pass along to you. But dividends from real estate investment trusts (REITs) and mutual savings banks are not qualified. You should check the year-end 1099 statements you receive from financial institutions and discuss which income qualifies for the lower rate with your tax adviser.

https://online.citibank.com/US/JRS/pandt/article.do?ID=LBP8

A quick look at Tongher 2009

Tong Herr Resources Berhad Company

Business Description:
Tong Herr Resources Berhad. The Group's principal activities are manufacturing and selling stainless steel fasteners. Products include nuts, bolts and screws and all other threaded items. It also operates as an investment holding company. Operations are carried out in Malaysia and Thailand. The Group distributes its products to Asia, Europe, North America and other countries.

Wright Quality Rating: LAC0





A quick look at Tongher
http://spreadsheets.google.com/pub?key=tfz75IeJ7n6inThzlEPxfMg&output=html

This is a cyclical stock.  Its industry is down with the poor economy.  However, its balance sheet is strong.  It has turned in profits for the last 2 quarters.  It has cash equivalent of RM 155.331 million and this equates to cash of RM 1.22 per share.

Shares Outstanding:  127.43 million
Closely Held Shares:  77.320 million




With so many shares closely held, this company is little different from a private limited company.  No wonder it is traded at a steep discount.

Why does this company keep so much cash unproductively employed?

Peter Lynch's 6 categories of stocks: Summing it up

Summing it up

That wraps up our practical introduction to Peter Lynch's six stock categories;

• slow growers (sluggards), 
• medium growers (stalwarts), 
• fast growers, 
• cyclicals, 
• turnarounds and 
• asset plays. 

These are only a guide, as companies won't always fit neatly into a single category, and the same company may move through several categories over the course of its life.

The biggest risk for investors is mis-categorising a stock.Buying a stock which you think is a fast grower, for example, only to find out a couple of years down the track that it is really a cyclical, is a chastening experience. And your own life situation and risk tolerance should dictate the weightings of each category in your portfolio.

If you've found these distinctions helpful, you might find it worthwhile heading to the source, Lynch's easy-to-read One Up on Wall Street.


Click:

Peter Lynch's 6 categories of stocks: Sluggards and Stalwarts

Peter Lynch's 6 categories of stocks: Fast Growers

Peter Lynch's 6 categories of stocks: Cyclical Stocks

Peter Lynch's 6 categories of stocks: Turnaround Stocks

Peter Lynch's 6 categories of stocks: Asset Plays

Peter Lynch's 6 categories of stocks: Summing it up