How to invest in cyclicals

If you’re interested in making money in the stock market, investing in cyclicals can be a great way to do it.

Last year when the Covid pandemic hit, much of the stock market took a hit. At the time, it seemed liked there was a lot of unknowns. What is Covid? Is this the start of the zombie apocalypse? It felt scary.

One of the worst hit sectors was oil and gas. For a brief moment, oil prices declined to less than zero. As a consequence many oil and gas producers saw big decreases in their share prices.

Before the pandemic, I was considering buying a Canadian gas producer called Seven Generations. At the time, you could buy the company for about 1/2 its book value. After the pandemic, the same company was trading at about 1/10 of its book value.

That’s when I started buying shares.

Although I had fear in buying stocks at that time, I was reassured by the wise well-known saying by Warren Buffett, “Be greedy when others are fearful, and fearful when others are greedy.” As well, I could see by reading the insider activity reports from my trading account, that the CEO was buying not just shares but debt too. The Canada Pension Plan, one the largest investment institutions in the world, was also making big purchases.

It’s about a year later and the company has merged into another company called Arc Resources. I still own the shares. The chart for Arc shows about a 90% return in just over a year. I’m actually up a little more since there was a premium given to shareholders of Seven Generations after the merger. It’s not the only cyclical in my portfolio. I have many others.

I’ll continue to hold and buy Canadian energy stocks since the price of oil and gas are making these companies extremely profitable for the first time in about 7 years. The cycle is turning upwards.