What is a Cyclical Stock?
A cyclical stock is a stock that is issued by a company that is heavily influenced by shifts in the economy, especially shifts that occur on a recurring basis. Generally, a cyclical stock will perform very well in periods where there is a heavy demand for the goods or services produced by the company, but experience some degree of downturn when the demand for the products temporarily slows. Cyclical companies are not to be confused with companies that represent a high level of risk. In fact, there are a number of businesses that operate at a profit simply by anticipating peaks and valleys in the demands of consumers throughout the calendar year. By planning for these predictable business cycles, it is possible to regulate the rate of production so that the company operates at a profit throughout the year, and is able to generate a return on the investments in stocks issued by the corporation. Corporations that can be considered cyclical in nature produce many of the products that are c
A good example of cyclical stocks is oil stocks. When supplies run low relative to demand the price goes up. Then producers come into the market and supplies increase. It takes a while to get the infrastructure in place to produce more oil, and and for it to slow down when there is enough to meet current demand. So then the price crashes and completes the cycle. Supply lags demand which creates a cycle of boom and biust.
A stock that rises quickly when economic growth is strong, and falls rapidly when growth is slowing down. An example would be the automobile market, because as growth slows in the economy consumers have less money to spend on new cars. Non-cyclicals would be industries like health care where there is constant demand.
” This group has momentum and it will continue for a while. But, at some point when the market tires of the cyclicals investors are going to look around and say, you know, those tech stocks still have great earnings and they look a lot cheaper. Then the money will flow back that way. One interesting note is that the stock group with the best earnings performance in the first quarter was technology. Yet tech stocks have been getting creamed for the last month. Q: What is your view on sector and index funds in general? A: Sector funds shouldn’t be thought of as funds, but perhaps as a substitute for a stock. You don’t know whether to buy Cisco or Sun so you buy a tech fund, and that takes some of the risk out of owning a particular stock. Most people don’t need to own sector funds, because choosing sectors is what fund managers do already. If you own the Magellan Fund, Bob Stansky is getting paid to decide what sectors to invest in. Index funds are different. An index fund is a low-cost
