Are value stocks cyclical or defensive? (2024)

FAQs

Are value stocks cyclical or defensive? ›

In general, defensive stocks tend to have a market beta of less than 1, meaning they will outperform the broader market when the index falls. In contrast, cyclical stocks tend to have a market beta of more than 1, meaning they will underperform when the index falls.

Value is often associated with economically sensitive “cyclical” stocks—companies that follow the trend of the economy, prospering when it does well and struggling when growth falters.

Defensive stocks are those that tend to provide stable earnings and consistent returns, even during an economic downturn. Shares of well-established companies in the consumer staples, utilities, and healthcare sectors are common examples of defensive stocks.

The Cyclical super sector has four sectors: Basic Materials, Consumer Cyclical, Financial Services, and Real Estate. The Defensive super sector has three sectors: Consumer Defensive, Healthcare, and Utilities. The Sensitive super sector also has four sectors: Communication Services, Energy, Industrials, and Technology.

A defensive investment strategy is a conservative method of portfolio allocation that emphasizes capital preservation. A value stock is a stock that tends to trade at a lower price relative to its fundamentals, making it appealing to value investors.

They include restaurants, hotel chains, airlines, furniture, high-end clothing retailers, and automobile manufacturers. These are also the goods and services that people cut first when times are tough. When people delay or stop buying anything dispensable, the revenues of the companies that produce and sell them fall.

Value stocks often outperform in "ordinary" recessions because of cheap valuation and sectors with businesses that hold up well; growth stocks create their own growth and do well in downturns.

Defensive stock refers to the shares of a company that show very little volatility irrespective of the movement of the market. In other words, they remain stable regardless of the economic state. These stocks do not get affected by economic cycles; therefore, they are also referred to as non-cyclical stocks.

Consumer defensive companies are engaged in the manufacturing of food, beverages, household/personal products, packaging, or tobacco. Procter & Gamble PG, PepsiCo PEP, and Costco Wholesale COST are among the largest companies in the consumer defensive index.

Is Tesla cyclical or defensive? ›

Tesla (TSLA)

Tesla is an automaker, which puts it in a decidedly cyclical industry.

Energy, materials, industrials, consumer discretionary, financials and information technology are traditionally considered cyclical sectors, as stocks in these sectors have tended to be highly correlated to economic cycles.

For a long time, and perhaps even today, Apple has been considered a highly cyclical business that ebbs and flows with the broader economic cycle.

Value stocks have conservative debt loads. Growth stocks often take a more aggressive stance, using debt to expand quickly.

Value stocks are considered relatively less risky compared to growth stocks. They are typically more stable and have lower volatility. The potential for capital appreciation may be moderate, but they often offer steady income through dividends.

Industries engaged in utilities, healthcare, and consumer staples are less reliant on business cycle shifts. Such companies produce or distribute goods and services we always need, so we refer to them as non-cyclical.

Cyclical stocks are those whose returns tend to rise and fall with the economy, because the companies make discretionary goods that people tend to stop buying during an economic downturn. Examples include: Travel: People tend to travel less for vacations and business during recessions.

A cyclical stock is one whose underlying business generally follows the economic cycle of expansion and recession. Cyclical businesses perform well during economic expansions but typically experience significantly declining sales and profits during recessions and other challenging economic times.

Typically during the early part of a recession, the stock market has negative returns. This is often because of the negative sentiment around poor or lackluster corporate earnings. But the stock market will often recover before the recession is over.

What industries should be avoided in a recession? ›

Retail, restaurants, hotels and real estate are some of the businesses often hurt during a recession. While such services “may enhance our quality of life, they're not necessary to maintain our basic standard of living,” Kantenga says.

When things are looking bleak, consider holding on to your investments. Selling during market lows can be one of the worst things you can do for your portfolio — it locks in losses. When the market evens out down the road, rebalancing may be in order.

For example, some investors might argue that certain giants in the tech sector — like Amazon and Alphabet (Google's parent company) — are prosperous, life- and industry-dominant, and adaptable enough to be considered defensive stocks.

A company stock with beta greater than one is called an aggressive stock. If beta is less than one, the returns on the company stock are less volatile than the market return. A company stock with beta less than one is called a defensive stock.

Disadvantages of Value Investing

The waiting period could be in years. One needs strong conviction to stay invested in value stocks. Value investment may not give you enough diversification. It is hard to find value buys in each sector that you need for diversification.

Deep value stocks include Citigroup, General Motors, T. Rowe Price Group, Medical Properties Trust, and Celanese.

Home Depot stock (HD) trades at 19 times versus an average of 21 times. Sure, sales of home-improvement products could decline as households spend less, but the sector also has defensive qualities.

Grading Defensive Stocks With AAII's A+ Stock Grades

Using AAII's A+ Investor Stock Grades, the following table summarizes the attractiveness of three defensive stocks—Colgate, Kimberly Clark and Procter & Gamble—based on their fundamentals.

What are the most defensive sectors? ›

Due to the constant demand for their products, defensive stocks tend to perform better in a declining market. There are three main defensive sectors: Utilities, Consumer Staples, and Health Care. Utilities: Water, gas, and electric utilities are needed in all phases of the business cycle.

Mentioned in this article

Amazon.com, Inc. (AMZN) is around the top of the Consumer Cyclical sector according to InvestorsObserver. AMZN received an overall rating of 66, which means that it scores higher than 66% of stocks.

Delta Air Lines (DAL Stock)

As a cyclical company, its revenue is sensitive to changes in the economy and consumer behavior. Back in January, Delta reported its fourth quarter 2022 financial results.

Pharma And IT:

In the Indian stock market, IT and pharmaceutical sector stocks are also considered as defensives.

Companies that deal with food, gas, and water are examples of those that have noncyclical stocks, such as Walmart. Adding noncyclical stocks to a portfolio can be a great strategy for investors as it helps hedge against losses sustained from cyclical companies during an economic slowdown.

Companies with non-cyclical stocks

Colgate. Tesco. Coca-Cola Company. Costco.

Even as a cyclical business, Netflix has been identified as a “safety” name by at least one prominent analyst. Yet, the potential for growth is still there, as an end to the current rate-hike cycle should put NFLX stock back into investors' good graces.

Bank Stocks: Banks are cyclical businesses. During periods of economic growth, people spend more and, therefore, borrow more from banks to do so, with credit cards for example.

Stocks in the oil and gas sector also tend to be cyclical due to their dependence on global demand. This means investors could have to go through booms and busts of an economic cycle if they choose to invest in the oil and gas sector.

Examples of cyclical stocks include Starbucks, Delta Air Lines, Disney, and Apple. Non-cyclical stocks are the opposite: They're also called defensive stocks because consumers continue to spend on these categories even during economic downturns.

How much of my portfolio should be in value stocks? ›

If you wish moderate growth, keep 60% of your portfolio in stocks and 40% in cash and bonds. Finally, adopt a conservative approach, and if you want to preserve your capital rather than earn higher returns, then invest no more than 50% in stocks.

More stability: Value stocks tend to have less extreme fluctuations than growth stocks. Consistent returns: Many value stocks pay substantial dividends to shareholders which can offer a consistent cash flow.

Regarding profitability, its return on tangible capital ratio was, on average, about 10% over the past five years, which is a below-average profitability level and also a key factor why Citigroup usually trades at a lower multiple compared to its closest peers.

Investors love to put stocks into various categories in order to make it easier to identify them. There are probably over one dozen stock classifications but we will describe only the following five here: blue-chip, growth, income, cyclical, and interest-rate-sensitive stocks.

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Value stocks tend to be less volatile than growth stocks and perform better in bear markets. Growth stocks historically outperform value stocks in bull markets. Value stocks generally pay higher dividends than growth stocks.

Value stocks are at least theoretically considered to have a lower level of risk and volatility associated with them because they are usually found among larger, more established companies.

Consumer cyclical stocks

Examples of each of these are provided below, but the main distinction is that durable goods remain useful over a long period of time, whereas non-durable goods have a short active-use cycle, or get consumed rapidly. Here's a list of some of the major consumer stocks: Tesla (TSLA)​

Finally, when it comes to overall long-term performance, there's no clear-cut winner between growth and value stocks. When economic conditions are good, growth stocks on average modestly outperform value stocks. During more difficult economic times, value stocks tend to hold up better.

Can value stock turn into growth stock? ›

For example, a stock can evolve over its lifetime from value to growth, or vice versa. It's also worth noting that investors in the value versus growth debate have the same goal (buy low and sell high); they're just going about it in different ways.

Dividends are a good indicator of a company's stability. What's more, dividend-paying stocks tend to be more stable during tough times than stocks that don't pay dividends.

Value stocks are expected to gain value eventually when the market corrects their prices. In the unlikely event that the stock doesn't appreciate in value as was expected, investors can lose their money. Hence, value stocks are relatively riskier investments.

At a glance. Growth stocks have done better than value sectors so far in 2023, driven by hopes of an imminent end to rate rises. An environment of stubborn inflation and higher interest rates should support value stocks' renewed outperformance in the months ahead.

Less volatile and risky

One of the major inherent benefits of value investing is it is subject to far less volatility and risk than most of the short-term investment approaches. This is because you are not purchasing stocks today to sell them off tomorrow.

Value stocks are considered relatively less risky compared to growth stocks. They are typically more stable and have lower volatility. The potential for capital appreciation may be moderate, but they often offer steady income through dividends.

Valued stocks are undervalued stocks. Growth stocks are overvalued stocks. Valued stocks have lower risk & volatility because even if the price doesn't go higher, you wouldn't lose anything. Growth stocks have more risk & volatility.

On average, value stocks have outperformed growth stocks by 4.1% annually in the US since 1927, as Exhibit 1 shows.

Examples of cyclical stocks include Starbucks, Delta Air Lines, Disney, and Apple. Non-cyclical stocks are the opposite: They're also called defensive stocks because consumers continue to spend on these categories even during economic downturns.

Costco (COST) In many ways, Costco isn't a traditional “cyclical” stock. The company is so successful that it can be hard to think of it as a retailer – but that is definitely a cyclical industry.