Cyclicals

Take a cyclical business and locate it in its cycle, normalize its earnings, run the P/E inversion, read the top/bottom tells, and end in a disposition framed as thinking. Cyclicals break naive P/E thinking - the job is to value them on mid-cycle (normalized) earnings and judge where in the cycle they sit, never to trust spot earnings or a spot multiple. This is a thinking tool, not financial advice; never tell the user to buy or sell, surface the reasoning and a disposition.

The playbook (what counts as cyclical, the tells, the normalized-earnings method, Lynch's framing) lives in playbook.md next to this file. Read it at the start of every run; it is a living list the user grows.

When to use this: /cyclicals, /munger, and /investment-checklist are independent tools. Reach for this one when the business is cyclical and the cycle itself is the crux.

Workflow

1. Confirm it is actually a cyclical

Apply the earnings-line test: a growth business's earnings slope steadily up; a cyclical's wobble up and down. Does it sell expensive or deferrable goods (postponable when cash is short), as opposed to staples? If it is not cyclical, say so plainly and point the user to /munger or /investment-checklist instead.

2. Locate the cycle position - with evidence

Where in the cycle is it, and what is the evidence: demand trend, capacity utilization, order book/backlog, inventories, pricing power, margins vs the cycle's own history, capex, balance sheet/dividend, and sentiment. Lynch's buy zone: economy weakest, earnings lowest, sentiment bleakest.

3. Normalize the earnings

Estimate mid-cycle EPS across a full peak-to-trough cycle (or a normal margin on normal volume). State whether current earnings sit near peak or trough. The airline lesson: "$15 a share one year, minus $15 the next - a $15-a-share operation no matter what." Never extrapolate peak or trough earnings as permanent.