Abreast of the market: Why cyclical stocks may be poised for a new surge
NEW YORK -- For months, economically sensitive stocks have been hotly pursued by investors scrambling to profit from a rebound in business.</br></br>Since October, Morgan Stanley's index of these "cyclical" stocks has rallied 14.8%, besting Standard & Poor's 500-stock index (up 7.8%) and leaving big consumer stocks (down 0.4%) far behind. Though cyclical stocks have surged almost 50% since the recession ended in March 1991, many stock analysts and money managers think more gains lie ahead.</br></br>"The gains you have seen in cyclical stocks are just a small blip," declares Donald Smith, who manages $800 million at an investment firm that bears his name. His portfolio, heavy with cyclicals, soared 20% last year, handily beating the broader market's 7.5% advance, and it's up another 13.5% so far this year.</br></br>Until now, Mr. Smith says cyclical stocks have been buoyed by merely a pickup in customer orders for basic materials and industrial products. But "eventually you are going to get volume growth and price increases, and then earnings will explode," he says.</br></br>Indeed, as some lumber companies are happily discovering, price boosts can do wonders for earnings. Last week, Pope & Talbot, a Portland, Ore., paper, pulp and wood products concern, said it expects its first-quarter profit to exceed 75 cents a share, up from one cent a year ago. The big gain is due to soaring lumber prices.