Cyclical Stock: What It Is, Examples, Risk and Return Potential (2024)

FAQs

What is a cyclical stock and examples? ›

Cyclical stocks represent companies that make or sell discretionary items and services that are in demand when the economy is doing well. They include restaurants, hotel chains, airlines, furniture, high-end clothing retailers, and automobile manufacturers.

Definition: In the investing world, cyclical stocks are those whose fortunes swing as per the business cycle of an economy. A cyclical stock typically moves up or down depending on the upward or downward movement in the economy.

The best reasons to invest in cyclical stocks are to get high returns, easy to identify stocks, and easy stock predictions. However, there are a few disadvantages, such as high risk and uncertain profits. Defensive stocks are quite the opposite of cyclical stocks as they are in regular demand and not in cyclic order.

Companies whose stocks are cyclical include car manufacturers, airlines, furniture retailers, clothing stores, hotels, and restaurants. When the economy is doing well, people can afford to buy new cars, upgrade their homes, shop, and travel.

Examples of Cyclical Industries

For example, the airline industry is a fairly cyclical industry. In good economic times, people have more disposable income, so they are more willing to take vacations and make use of air travel. Conversely, during bad economic times, people are much more cautious about spending.

Cyclical stocks are viewed as more volatile than noncyclical or defensive stocks, which tend to be more stable during periods of economic weakness. However, they offer greater potential for growth because they tend to outperform the market during periods of economic strength.

Cyclical risk is the risk of business cycles or other economic cycles adversely affecting the returns of an investment, an asset class, or an individual company's profits.

Cyclical stocks are stocks of companies whose prices move strongly with the state of the economy. These are usually companies that provide non-essential goods and services. If the economy grows, cyclical stocks typically benefit. If the economy goes into recession, cyclical stocks often fall sharply.

Cyclical businesses perform well during economic expansions but typically experience significantly declining sales and profits during recessions and other challenging economic times. Cyclical stocks tend to move up and down in value alongside the market.

Are cyclical stocks good for long term? ›

Low price to earnings

Cyclical stocks have a very low price-to-earnings ratio (PE) compared to non-cyclical stocks. These stocks become less desirable when the economy is falling. Hence investors avoid such stocks for the long term, resulting in lower PE.

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. On the other hand, when there is a recession, the opposite is true.

Early cycle: Generally, a sharp recovery from recession, as economic indicators such as gross domestic product and industrial production move from negative to positive and growth accelerates. More credit and low interest rates aid profit growth. Business inventories are low, and sales grow significantly.

Cyclicality: The oil and gas sector tends to include cyclical businesses, meaning that investors are likely to experience booms and busts. Volatility: Oil and gas companies face other factors beyond their control. The prices of oil and gas are a major factor in the valuations of oil and gas stocks.

What Is an Example of Cyclical Unemployment? An example of cyclical unemployment is when construction workers were laid off during the Great Recession following the financial crisis of 2008.

Cyclic motion can be defined as the motion undertaken by an object that follows a repeating path over time. Examples include a person walking, running, skipping, riding a bike, a pendulum swinging, a ball bouncing, wings flapping, and a piston moving.

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.

Companies with non-cyclical stocks

Colgate. Tesco. Coca-Cola Company. Costco.

Is Amazon a cyclical stock? ›

Amazon is a cyclical business, as e-commerce and cloud computing are driven by consumer and business demand and are closely connected to the economy's overall health. That's part of the reason the company's growth slowed sharply in 2022.

Biotechnology stocks are notoriously risky. The vast majority of new experimental cures will fail, and, not surprisingly, most biotech stocks will also eventually fail. Thus, there is both a high percentage chance of underperformance (most will fail) and a large amount of potential underperformance.

The Disadvantages of Investing in Cyclical Stocks

Cyclicals respond more violently than growth stocks to economic changes. They can suffer mammoth losses during severe recessions and can have a hard time surviving until the next boom.

The 3 Steps of Risk Management

The risk management process consists of three parts: risk assessment and analysis, risk evaluation and risk treatment.

Companies that provide hardware, such as semiconductors face significant cyclicality in earnings as inventory management exacerbates weak demand (e.g. sell-in vs. sell-through). Conversely, software is sold on a subscription basis, and consequently software companies have steady earnings.

(sɪklɪkəl , saɪk- ) adjective. A cyclical process is one in which a series of events happens again and again in the same order.

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.

Cyclical stock valuations

To compensate for cyclical effects, you can use average earnings over at least 10 years. You should also use the long-term average growth rate, rather than extrapolating the current growth rate into the future. Historical price earnings ratios for individual cyclical companies are also useful.

The crux is that cyclical stocks are largely dependent on economic growth.

Which industry is most cyclical? ›

Betting on value today is a defensive trade

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.

Another benefit with many cyclical stocks is that they pay a dividend. Many of these companies have been around for a long time and have a business model that helps to generate strong cash flow. This cash is then returned to shareholders by way of a dividend. These dividends do not typically have a high dividend yield.

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.

These types of stocks, such as PepsiCo, Inc. (NASDAQ:PEP), Johnson & Johnson (NYSE:JNJ), and The Procter & Gamble Company (NYSE:PG), are known as counter cyclical stocks and tend to perform better during recessions.

Tesla Is Behaving As A Deep Cyclical Business. Recent developments and massive price cuts in order to move inventory show signs that Tesla is prepared to overproduce in order take and retain market share.

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.

The real estate sector, like the economy, moves through cycles, albeit ones marked by periods of undersupply, growth, and consolidation. Macro factors such as GDP and population growth shape the industry in the long run.

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.

A rating of 49 puts General Motors Company (GM) near the top of the Consumer Cyclical sector according to InvestorsObserver.

Is Mcdonald's a cyclical stock? ›

MCD – Cyclical stocks, which have a strong correlation with economic cycles—boom and downturn—are expected to perform well in the coming months as the economy recovers. However, since an investor rotation into these stocks started earlier this year, many of them don't now have significant room left to run.

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.

It is a cyclical industry and as cyclical industries go, it has had its ups and downs over the years. But even among cyclical industries, the airline industry is a black sheep of the flock known for its unpredictability and complexity, making it a challenging sector for investors to navigate.

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.

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.

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.