The Motley Fool's analysts aren't generally known for being head over heels in love with highly cyclical stocks, but the thrill of trying to correctly time getting on or off a roller coaster of a share is undeniable. While it's impossible to know for certain when it's time to ditch a cyclical without a crystal ball, it's still worth exploring whether its time to say sayonara to shares such as ITV (LSE: ITV) and Persimmon (LSE: PSN).
Television companies may not be the first example to spring to mind when cyclical stocks are mentioned but their high dependency on advertiser spending means the health of the broader economy is of paramount concern for TV executives.
Judging by the 37% fall in share prices since the beginning of the year investors were beginning to lose confidence in ITV even before the EU Referendum vote in June. Why the negativity? It's not down to ITV's core business as interim results showed an 11% rise in revenue year-on-year and 10% jump in EBIT.
The main culprit is fear that economic growth is stagnating, which ITV's interim results did nothing to dispel as TV advertising didn't grow at all year-on-year. Many analysts see adspend as a bellwether for economic health, which is something ITV shareholders should bear in mind.
The good news is that ITV management is working hard to lessen the effects of cyclical adspend on the business by spending heavily on in-house productions. Revenue from internal studio productions is becoming a bigger chunk of business and was worth roughly a quarter of EBIT over the past six months.
Unfortunately, this still illustrates just how dependent ITV remains on advertisers and the overall health of the economy. It's been a hell of a run for shares since the financial crisis but with the possibility of a Brexit-related economic slowdown looking more and more likely I'd be wary if I were an ITV shareholder.
Watch and wait?
It's little surprise that shares of Persimmon are off 13% since the start of 2016. Like ITV, the housebuilder is a solid company with strong competitive advantages it can't escape the headwinds many see coming for the domestic housing market.
While Persimmon hasn't released financial results that cover the period after the EU Referendum, there are a few points that would make me nervous if I owned shares. Foremost among these is the reliance on government policies such as Help-to-Buy to stoke demand for the lower-cost homes Persimmon builds.
And, while sales of new builds appear relatively resilient in the months following the Brexit vote, estate agents have begun ringing warning bells that all is not well in the overall market.
Still, the company's last interim results showed just how strong the underlying business has been with gross margins hitting 26.9%, net cash reaching £462m and dividends once again increasing as bumper profits continued. Until there's further hard data released on home demand it could be too early to cut loose a quality company such as Persimmon.
Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended ITV. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.