Course 408: Cyclical Stocks
How Expensive Is It?
In this course
1 Introduction
2 How Is the Company Doing Now?
3 How Wildly Do Sales and Profits Fluctuate?
4 How Leveraged Is the Balance Sheet?
5 Does the Company Consistently Generate Positive Cash Flow?
6 How Steady Are the Company's Dividends over a Cycle?
7 Is the Firm Diversified Geographically and by Product Line?
8 Is the Long-Term Trend in Sales and Profits Upward?
9 How Has the Stock Performed?
10 How Expensive Is It?
11 How Expensive Is the Company Based on Normalized Earnings?
12 How Does the Price/Sales Ratio Compare with Historical Levels?
13 Conclusion: Get 'Em while They're Cold

The stock runup makes United Technologies a dicey investment. True, we have seen that United Technologies, for all its blotches, has been a pretty strong company over the long term. It is therefore natural that its stock should fetch higher valuations than the doormats of the cyclical category--companies such as the Big Three automakers, the big steel producers, and consumer-electronics makers. As with most cyclicals, though, it's only a matter of time before the bottom falls out from under United Technologies' profits. True, the company's P/E ratio of 19 at the end of 1999 was lower than that of the S&P 500, and even though it also had a P/E of 19 in 1995, it had actually fallen relative to the index. But a closer look at the stock's valuations shows that United Technologies is riskier than it might first appear.

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