Idea No 8 : Don't leverage to buy stocks but ride on firm's operating and debt leverage for huge gains

Cyclicals Stocks : These stocks are excellent examples as to how one can benefit on firm's operating and debt leverage .  

What are Cyclical stocks ??

This  category of stocks that success and failure depends  heavily on the business cycle and economic conditions . Metals , Manufacturing , Automobile and auto ancillaries etc are part of this category.

Consumer cyclicals include industries such as automotive, housing, entertainment and retail. The category can be further divided into durable and non-durable sections. Durable cyclicals include physical goods such as hardware or vehicles, while non-durables represent items like movies or hotel services. 

The performance of consumer cyclicals is highly related to the state of the economy. They represent goods and services that are not considered necessities, but luxurious purchases. During contractions or recessions, people have less disposable income to spend on consumer cyclicals. When the economy is expanding or booming, the sales of these goods rise as retail and leisure spending increase.

Consumer Cyclical stock Buy decision : 

Ideally stick to market leader or second player as the profit margin reduces dramatically in relation to market share . The right time to buy is 2-3 years in to bear market when most negatives have been factored in and industry capacity reduces by Min 20%  . Guiding Value indicators 

The Max ( Avg last 3 yrs )  PE ratio  to be paid at any time is 10 
Debt equity ratio should not be more than 1.5
Prices to sales ratio need to be capped at 1


Consumer Cyclical stock Sell  decision :

The right time to buy is 3-4  years in to bull market when most positives  have been factored in . You may decide  not to sell the stock if you are in country where population is growing . Guiding Value indicators 

The PE ratio is greater than 20 
Debt equity ratio is greater  than 2 . 
Prices to sales ratio is greater than 2

Consumer Cyclicals tend to have high operating and debt leverage relative to defensive and hence these stocks exhibit sudden increase in profitability when economy starts booming  and can turn out to 20 - 50 bagger before becoming expensive . So if you have picked the stock at right time it is better to hold the stock for at least 5 to 6 years . 

A small example below illustrates how consumer cyclicals can become 20 bagger 

Simple Worksheet
	Bear Market	Bull Market
Revenues  in Crs	1000	2500
Varaiable cost 60%	600	1500
Contribution	400	1000
Operating leverage
Capacity Utlisation	50%	100%
Fixed Overheads	100	100
PBIT	300	900
Debt Leverage
Long term Borrowing  Cost	10%	8%
Debt	2000	1000
Interest	200	80
PBT	100	820
Tax ( 30%)	30	246
PAT	70	574
PE	5	15
Share Price	350	8610