Cyclical Stock

Intermediate

A cyclical stock is a share in a company whose sales and profits rise and fall strongly with the economic cycle, doing well when the economy is growing and poorly during downturns.

Cyclical companies sell products or services that people and businesses buy more of when times are good and cut back on when times are hard. Examples include car manufacturers, airlines, hotels, construction companies, luxury goods makers, steel and chemical producers and some banks.

For example, when the economy is booming, people buy new cars and take more holidays, boosting profits for carmakers and airlines. In a recession, these purchases are often postponed, and profits can fall sharply or turn into losses.

Cyclical stocks tend to have higher betas, meaning their share prices move more than the overall market. They can deliver strong returns when bought early in an economic recovery, but can fall heavily when the economy weakens.

Timing is difficult. Cyclical stocks often look cheapest, on measures such as price-to-earnings, at the peak of the cycle when profits are highest, just before they fall. They can look expensive at the bottom, when profits are depressed.

They are often contrasted with defensive or non-cyclical stocks, such as utilities and food producers, whose sales are steadier regardless of economic conditions.

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