Cyclical Risk/Reward Analysis Results In BorgWarner Profit Taking

Jan. 12, 2018 2:59 PM ETBorgWarner Inc. (BWA)

Summary

  • BorgWarner was the first stock I identified and invested in using a cyclical investment strategy I developed a couple years ago.
  • It will now be the first stock in a new series of articles that focus on the potential losses investors may face if the business cycle turns south.
  • Many investors are unaware of the dramatic sell-offs that even quality cyclical companies are likely to have if the economy contracts or earnings growth slows.
  • BorgWarmer has had wonderful returns over the past two years, but a look at the risk/reward in an aging bull market means that it is time to take profits a little earlier than planned.

Introduction

Since I first wrote about BorgWarner (NYSE:BWA) as an investment idea two years ago, it has had a good run:

ChartBWA Total Return Price data by YCharts

It has performed almost exactly as I predicted it would, and it remains a wonderful company. However, I recently wrote an article about Chicago Bridge & Iron (CBI) titled "How Investors Could Have Easily Avoided Chicago Bridge & Iron's Recent Sell-Off". It was a different style of article than I had previously written for Seeking Alpha. Typically I write about value stocks that I have previously purchased and the articles explain why I purchased them. In this case, however, I hadn't purchased CBI even though it met many of my basic criteria for a cyclical investment, and I wanted to share the reasons why I hadn't purchased the stock with readers.

The most common critique of the article came from CBI shareholders who had purchased the stock at significantly higher prices and who were sitting on gigantic losses. Their complaint was that my article didn't do them any good now the that price had already dropped. While I still thought my article offered value for potential future purchases they may make, I think they had a reasonable point. An article that pointed out CBI's potential price decline before it happened may have been helpful to some investors who were not aware of CBI's historical price cycles. So, while I am not able to say when a cyclical stock's price will decline using my historical research on price cycles, I can give investors an idea of what the magnitude of those declines might be.

With this goal in mind, I have decided to write a series of articles that focus on popular cyclical stocks that are near historic highs and offer some insight into

ChartSPY data by YCharts

ChartBWA data by YCharts

ChartBWA data by YCharts

ChartBWA data by YCharts

ChartMYL data by YCharts

This article was written by

Cory Cramer profile picture
20.21K Followers
One-of-kind research using historical cycles to identify tops and bottoms

My analysis focuses on the cyclical nature of individual companies and of markets in general. I've developed a unique approach to estimating the fair value of cyclical stocks, and that approach allows me to more accurately buy near the bottom of the cycle.

My academic background is in political science and I hold a Bachelor's Degree and a Master's Degree in political theory from Iowa State University. I was awarded a Graduate Research Excellence Award in 2015 for my research on conservatism.

Disclosure: I am/we are long MYL, MDR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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