A fast moving cyclical stock - Peter Lynch Investor

A fast moving cyclical stock

May. 6, 2019   Category: Cyclicals

When you invest in cyclicals, timing is important.

In One Up on Wall Street, Lynch says,

“Timing is everything in cyclicals, and you have to be able to detect the early signs that business is falling off or picking up. If you work in some profession that’s connected to steel, aluminum, airlines, automobiles, etc., then you’ve got your edge, and nowhere is it more important than in this kind of investment.”

It’s advice that has served me well. Although I’m not an expert in commodities, I’ve been able to make up for my shortcomings.

One thing I routinely do is follow commodity news. I set Google Alerts to keep me informed on the latest news. Kitco is a great source for information on metals and mining. Recently, these tactics helped me profit on zinc.

Zinc gets used to galvanize steel. Steel production had been seeing a modest increase. As a result, zinc stockpiles at the London Metal Exchange dropped.

Seeking to profit on higher prices, zinc miners have been looking for smelters to refine their ore. Only problem is that China closed down their smelters because of environmental issues.

As a consequence, the few existing smelters have bargaining power and have increased their rates to refine the metal. One of those smelters is Noranda Income Fund.

3-month chart of Noranda Income Fund

Digging a little deeper, I found that several directors on the board at Noranda had been buying the stock at roughly $1.40/share. There hadn’t been any selling.

Noranda Income Fund insider buying and selling

When I bought the stock at $2.10/share the momentum was well underway. The stock was skyrocketing. I determined so long as the story remained and insiders weren’t selling, I’d ride the momentum.

Sure enough, a month later the story changed. Stockpiles increased and prices decreased. I sold my shares and made a 25% return.

I cite this story because it demonstrates the effectiveness of Lynch’s ideas. Categorize your stocks and prepare to sell when the story for buying them changes.

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