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Cycle Killers

The start of a recovery is the time to buy cyclicals; in the old days, that meant smokestack stocks -- traditional manufacturers, now long gone -- but what are the best cyclicals for today?

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"The cyclicals are running, the cyclicals are running!" And with that ecstatic cry, my wife and former partner, the Trading Goddess, would put every net, every gaff, every hook into the market's choppy waters to trawl for as many smokestackers as she could in one froth-filled moment. "Take 25 Reynolds, 25 Amax, 25 Carbide -- no, 50 Carbide, 25 Bessie Steel, 25 Champion Paper, 25 Union Camp, and 100 Armco and Clue" -- that's Kaiser Aluminum, or KLU -- " 'cause those are little guys," she would bark to Max, her favorite broker. "You," she would scream at me, as if I were some sort of hapless, unhelpful bystander, "hit the lines and buy 50 Cypress, the mineral kind, 50 Quantum, the chemical kind, and 50 each Hammermill and Great Northern Nekoosa -- and don't screw it up."

And the chase would be on. Once upon a time, this country had tons of companies that made things -- all those boring, pedestrian things that went into an economy. And we were actually pretty good at it, decent makers of beams and board, of polypropylene and hot-rolled steel. Periodically, after the economy had stalled, the Fed would put a match to the pilot light and a cyclical conflagration would explode, as America and the world started ordering products that had been on the shelves for so long that we were shocked to find that the cupboard had suddenly gone bare and we, as a nation, were out of inventory.

Now all of those companies are gone, merged or Chapter 11'd into oblivion. The days of making dozens of smokestack bets in a few minutes now seems like a sepia-toned memory.

But that doesn't mean we still can't have a good old-fashioned cyclical run. After nearly ten years without a recession, followed by a shallow but brutal economic collapse, what's left of the old industrial economy is again ready to roar. There may not be schools of old-style industrials we can net for a quick two or three points, but this country still makes things, and the companies that fashion metal and plastic, that bend it, mold it, weld it, and forge it, are roaring as they haven't done in a dozen years. For most stock pickers, accustomed only to flavors of semiconductors or software, personal computers or mainframes, routers or wireless, it's a brand-new world, but to this grizzled vet, it's a familiar run at the basic flavors, the chocolate, vanilla, and strawberry of the American economy.

The key to playing a cyclical rally is to recognize that these companies are going to put on, over the next six months, a lifetime's worth of points. Cyclicals tend to do nothing for years and years, not until the economy is in the sweet spot, coming out of recession and growing jobs without inflation and with no fears of the Federal Reserve ratcheting up rates. That's exactly where we are now. Most stock pickers I know are specialists, knowing only telecommunications or cell phones or hardware. I was always an old-school generalist, keeping my hands in pretty much every industry, as fascinated by the making of uncoated free sheet and polyvinyl chloride as I was by the creation of high-tech wonders and the stocks behind them.

Which is why I can give you the five cyclical companies still left that are rocking and rolling on Wall Street right now, and should stay in that groove through the rest of 2002. Your broker's probably forgotten these even existed, but I haven't. I either own these stocks already or am just waiting for that exquisite moment -- a quick little pullback, for example -- to pounce on them.The keystone to any cyclical portfolio is Caterpillar. It's hard for me to push this stock on television without calling it Cat Tractor, because that's what we called it when I broke into the business, but it has long since diversified away from plain old tractors and recently divested farm equipment altogether. This Caterpillar is a lean, mean money machine with power tools, power engines, and power-generation equipment that are the envy of the world. While the stock has been strong of late, all I can say is: You ain't seen nothing yet. This stock will soon be a "core holding" of all of those funds now realizing that Gateway, Sun, and EMC aren't going to bring in any new money.

Alcoa's next. It is hard to imagine that the squeaky, brittle-sounding man who is the Treasury secretary of the United States, Paul O'Neill, was at one time a great, classic industrialist. He was. And he took Alcoa from a sleepy bender of thin metal into the world's dominant aluminum company. Going into this recession, the world was awash with aluminum, so this stock has done nothing; coming out of it, shortages will develop, prices will go higher, and Alcoa's stock will soar.

You can't have a cyclical recovery without paper prices going higher. It always happens. The last time we were in this recovery situation, there were a half-dozen terrific ways to play a rise in paper prices. There still are a half-dozen, but they are all under one roof because International Paper has consolidated the industry. Like Alcoa, this stock has done next to nothing, in part because natural-gas prices had hindered margins and a strong dollar had hurt competitive efforts overseas. That's changing right now. Look for International Paper, currently in the low forties, to trade through the fifties by the end of the summer.

What International Paper did to paper, what Alcoa did to aluminum, Dow Chemical did to plastic: It bought everybody important but DuPont. Of course, it also bought a ton of asbestos liability when it picked up Union Carbide last year, and that's got some people fretting about lawsuits. That's capped the stock until now, and I think that it's very much ready to roll as judges start reversing massive tort victories. Dow, in the thirties, is a caged tiger ready to pounce into the fifties.

Finally, there's Tyco, a controversial conglomerate that's been blasted for disclosure problems of late. The company's gotten religion, although the conversion had to be forced on management, and now its eclectic group of products, ranging from fire extinguishers to connectors (the simple cables that hold our electronic world together), could begin to show blow-away results.

The run won't be like the old days, broad and vast. But the revival is for real, and my knowledge base, at last, after ten fallow years, finally shows signs of paying off.

Oh, and one other thing. Don't forget to sell them after they have doubled. Cyclical nirvana never lasted long, even in the golden age of U.S. manufacturing. Don't overstay your welcome.

TheStreet.com
Get all of James J. Cramer's stock picks via e-mail before he makes the trades by subscribing to Action Alerts Plus. A free two-week trial subscription is available at www.thestreet.com/aaplus.

James J. Cramer is co-founder of TheStreet. com. At the time of publication, he owned stock in Alcoa, Caterpillar, and Tyco. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions that he takes may change at any time. e-mail: jjcletters@thestreet.com


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