As the name implies, cyclical stocks are stocks of those companies whose performances vary cyclically according to their respective business cycles. If the industry is in the scenario where it is on the upturn, stocks of companies comprising this industry will be on the upturn as well. If on the other hand, the situation is one that is of a downturn, stocks will also facing a downturn in their returns. Industries like commodities, airlines, white goods manufacturing etc., are industries, that are cyclical and hence companies within these industries are designated as cyclic stocks.
A good example to understand the performance of these stocks is to consider a wheel of a moving automobile. One particular section of the tire will be on top at a given time. Shortly afterwards, that portion of the tire will move downwards and will reach a position where it will be right at the bottom. After reaching the bottom-most limit, the tire portion will rise up again and will eventually reach the top and the cycle repeats again. This is identical with cyclical stocks. The only difference is that in an automobile tire, it takes milliseconds for tire sections to move from top to bottom and then top again. For cyclical stocks this period can be several years.
Identifying Cyclical Stocks:
Identifying cyclical stocks is not difficult. It is very straightforward. Cyclical stocks belong to industries that are cyclical in nature. Some of the very good examples of cyclical industries are automobile, heavy machinery, steel, furniture, airlines, etc. The profits and hence the share prices of companies belonging to these industry segment go up and down depending on which cycle the concerned industry is under and hence the word ‘cyclical.’ Broadly speaking, they follow the economy’s boom and bust cycle. They enjoy riding on economic booms and they suffer jolts of economic downturns.
Investing In Cyclical Stocks:
A question asked very frequently by serious investors is, “Do cyclical stocks pay in the long term?” Well the answer is not that straightforward. Predicting upturn in an economy is very difficult. The same goes with economic downturn cycle. Many cyclical stocks begin to perform well quite a while before the economy starts to look up. On the other hand, when they are down, they normally tend to stay down for very long. Hence, in order to make a profitable investment in cyclical stocks, timings to enter and exit should be perfect.
Relying on cyclical stocks for long-term gains is a tipsy investment strategy. Investors who still fancy cyclical stocks should have a sound entry and exit policy in place. They should be ready to off-load when economic outlook begins to appear bleak. They should be on a buying spree when economic indicators indicate upturn in economic growth. These stocks are not good stocks for buying and holding strategy.