What are cyclical stocks? Cyclical stock is stock from a company that is sensitive to business cycles and whose performance is strongly tied to the overall economy. Cyclical companies tend to make products...
Cyclical stock is stock from a company that is sensitive to business cycles and whose performance is strongly tied to the overall economy. Cyclical companies tend to make products or provide services that are in lower demand during downturns in the economy and higher demand during upswings. Examples include the automobile, steel, and housing industries. The stock price of a cyclical company will often rise just before an economic upturn begins and fall just before a downturn begins. Investors in cyclical stocks try to make the largest gains by buying the stock at the bottom of a business cycle, just before a turnaround begins.
Economists pay close attention to cyclical stocks to measure how the overall economy is doing. They can indirectly track consumer confidence through cyclical stocks. For example, when the economy is really humming, people feel confident enough to buy new cars. When the economy is down, people put off buying a new car. And it doesn't take a full-blown recession to cause cyclicals to drop. Even a slight economic downturn can cause cyclical stocks to lose value immediately, and for good reason. When you lose your job, you change your spending habits right away.
Some experts are including stocks like Nike in the cyclical category for the same reason. When people are earning a lot, they feel comfortable spending a relatively high price for athletic shoes, but during a recession they will put off buying new shoes or spend their money on less expensive shoes.
An example of a non-cyclical stock is stock from the health care industry because in the health care industry demand is constant. People will still buy cough medicine, whether the economy is in recession or not.
Because cyclical stocks do well when the economy is prospering and do poorly when the economy suffers, it seems that it should be pretty easy to predict movements in value. And from an investor's point of view, cyclicals offer the potential for serious capital growth if you buy shares at the bottom of the cycle just before an upturn. But getting the timing right can be difficult.
In researching cyclical stocks, start by checking out stocks in the following industries: automotive, steel, housing, oil, mining, and transportation.
Most investors do not consider cyclical stock to be buy-and-hold stocks as they can produce breath-taking gains one year and devastating losses the next. As previously mentioned, cyclical stocks work best when they slide in and out of your portfolio in harmony with the overall economy. Timing is everything.
Cyclical stocks are opposite of defensive stocks.
