Cyclical Investing's Countercyclical Payoff: Street Whispers

Apollo's entry point into LyondellBasell came as markets and the global economy turned from a boom to the biggest bust since the Great Depression. Saddled with a near $30 billion debt stock from a debt fueled 2007 merger between Houston-based Lyondell and Basell of the Netherlands, a subsidiary of investing conglomerate Access Industries, the company quickly suffered from downturn and was forced into bankruptcy.

When making an initially mistimed 2008 investment in LyondellBasell's debt and a subsequent push for equity control in its 2009 bankruptcy, Apollo faced an investment in a company with negative earnings and cash flow that made it expensive on classic valuation multiples.

But when projecting LyondellBasell's future earnings or by studying its trailing results, Apollo likely saw a bargain-priced company in 2008 and 2009. Now, if ordinary investors see the company's current low earnings multiples as a similar bargain they are misguided.

McNulty, who rates LyondellBasell shares a "Buy" with a $60 price target, makes the argument that while the company's valuation of less than five times EBITDA looks like a cyclical low, that's only because earnings are churning at a cyclical high. In his continued optimism on LyondellBasell shares, which have gained nearly 50% in 2012, McNulty makes the point that if earnings have topped out, he expects valuations haven't.

For instance, while McNulty cut his 2013 and 2014 earnings estimates, implicit in his 'Buy' rating is a rise in LyondellBasell's earnings multiple.

In this counterintuitive investing dynamic no one has more at stake than Apollo.

The private equity firm's near 30% shareholder in LyondellBasell worth roughly $9 billion comprises almost half of its largest private equity fund. Meanwhile, investment gains in the fund of nearly 33%, driven by its LyondellBasell investment, account for nearly 20% of the firm's total investing profits over its 20-year plus history, according to its latest earnings.

Other large LyondellBasell shareholders include private equity fund Access Industries, which maintained a 14% stake in the company after ceding control of it in bankruptcy - and hedge fund investors Viking Global Management and Ares Management, who own roughly $500 million of the company's stock.