Cyclical stocks good value, says broker

THE time could be ripe to invest in cyclical stocks exposed to the general economy, according to Merrion Stockbrokers.

It has tipped Independent News and Media (INM), Jury's Doyle, Kingspan, CRH, IONA and Parthus as recovery stocks.

Merrion's head of research Rory Gillen said given the perceived lack of confidence in economic recovery in the US, it is surprising to see that cyclicals have led the recovery in the US stock market "In an Irish market context, we would identify the main industrial cyclical stocks as CRH, Independent, Waterford Wedgwood, Jury's Doyle, Kingspan and Barlo and, in technology, IONA and Parthus," he said.

Mr Gillen says CRH has suffered a severe derating in 2002 reflecting sector weakness, earnings uncertainty, lack of progress on the acquisition front and, more recently, on asbestos exposure concerns.

"The company is trading on a sub-10 times rating which, we believe, is exceptionally attractive given the group's track record," he added. The share price of the owners of the Irish Independent INM has collapsed since January, 2001 wiping almost 1bn off the company's market capitalisation Mr Gillen says the shares offer an upside on a recovery in global advertising. Mr Gillen points out Waterford Wedgwood has suffered a significant derating as demand for its fine crystal and china products suffered in the aftermath of September 11, 2001.

"A heavy debt load and the requirement for further restructuring has also dented confidence. A prospective price-earnings ration of under 7 times reflects significant near-term earnings uncertainty. We believe there are clearer cyclical recovery opportunities elsewhere," he said.

The Merrion analyst believes Jury's Doyle looks a safer bet in a cyclical recovery.

Kingspan also looks a clearer cyclical bet, according to Mr Gillen. He says the Merrion view is that Kingspan represents an attractive cyclical recovery play. Merrion also points out that technology stocks have also participated in the recent market bounce.

"However, it may well prove to be nothing more than a relief rally as there is as yet no evidence of a pick-up in business spending on technology," he cautioned.

In an Irish market context Merrion says IONA and Parthus represent attractive recovery plays in the technology arena.

"Parthus is a leading semi-conductor intellectual property company and is currently trading at just above its cash backing, with very little cash burn expected. IONA, an IT infrastructure play, also trades at cash value,

although the cash burn rate is higher," said Mr Gillen.