hi anant,
What Lynch mentions essentially means that once the profits of so called cyclicals begin to tumble they will be out of proportion to the fall in stock price. Especially in automobiles there will usually be losses as fixed costs are going to remain same and sales vols begin to reduce. So company begins to post losses or very low profits and hence the EPS part of PE starts getting smaller and hence higher PE, even though prices might have corrected significantly.
But buying all high PE auto or any other cyclical stocks does not always work. One has to be tuned into the change of scenario by looking at first signs of improvement in business environment. Entering these stocks earlier might lead to a lot of suffering bcos the stocks of these sectors u own dont budge/or go down while markets may be making merry.
e.g If u look at the retail cement prices and monitor despatches of cement by various companies, one could easily make out that some amount of good times for cement as a sector might be forthcoming. ACC, ambuja cement, shree cem etc the bigger players have started moving up. The smaller guys will start their move later on in the game but the demand till then needs to sustain or increase.
hope this clears some of ur doubts.
regards
hitesh.