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 considered important components of modern life. Among these companies are auto producers, some types of chemical producers, and seasonal products such as holiday supplies.
Cyclical stocks tend to follow the market pattern exhibited by the company. This means the stocks are likely to increase in value as the company enters into a business cycle where demand as high. For example, the cyclical stock issued by a company that manufactures Christmas decorations would tend to increase in value during the fourth quarter of the calendar year, but experience a drop in value during the first and second quarters of the new calendar year. To a degree, this qualifies cyclical stock as a form of defensive stock, in that actively planning for a period where a drop in value is expected becomes just as important as projecting increases in the value.
Investing in cyclical stock can be a lucrative activity. Often, companies whose stock is considered to be cyclical in nature are stable and have a clearly demonstrated history of performance that can easily provide a blueprint for future activity. Because it is often easier to predict the future performance of cyclical stock in both the short term and the long term, it is possible for an investor to determine when the time is right to purchase additional shares, and when it might be wise to sell currently held shares.
