What are cyclical stocks?

What are cyclical stocks?


1st September, 10:14
Updated: 23rd September, 07:20

Certain classes of stocks are more sensitive to changes in the broader economy than others. Let’s investigate.

These are often referred to as cyclical stocks, and they can be profitable investments if your timing is right. In this lesson, you’ll learn what cyclical stocks are, their key characteristics, and where you can go in order to buy them. You’ll also find examples of some cyclical stocks that could make for promising investments.

What are cyclical stocks?

Cyclical stocks are stocks whose prices are heavily influenced by broader economic trends and cycles. Many cyclical stocks are consumer discretionary companies that do well during economic good times but struggle during recessions. 

Why do investors look for cyclical stocks?

Investors look to time their investment right when putting their money into cyclical stocks. Targeting cyclical stocks when the economy is expanding can lead to large gains if you get in on the ground floor. Just remember that as with any stock type, you want to pick the best of the best. Target cyclical stocks during economic good times, but pick the ones with the best earnings and revenue growth to give yourself the best shot at big stock price gains. 

What are the defining characteristics of cyclical stocks?

1) They do well when the economy does well

A booming economy creates more money for consumers, which drives consumer spending, which leads to bigger profits for retailers, banks, manufacturers, and other economically sensitive companies, which leads to big price gains. In a recession, the inverse happens and cyclical stocks typically perform poorly, which brings us on to the next point.

2) They fare poorly during recessions

When the economy turns south and consumer spending dries up, cyclical stocks can suffer big price losses. When that happens, cut your positions, or sell entirely. Don’t try and swim against the tide. 

3) Cyclical stocks’ products are often luxury items

New cars, hotel stays, and new laptops are items that consumers buy in good times. But they’re not necessities, so the makers of those items are at risk during recessions.  

Here are some examples

If you’re looking for cyclical stocks to invest in, the following companies are worth looking into and considering.

1) Carnival (CCL)

Few industries got hit harder by global COVID-19 lockdowns than cruise ship operators. But with optimism rising as infection rates taper off as economies reopen, cruise companies could rebound. Carnival’s stock more than doubled in price from early April to early June 2020, and could keep climbing as the global economy recovers.

2) 1-800-Flowers.com (FLWS)

Flowers and gifts retailers fit the category of luxury goods items that fare best when the economy’s doing well but struggle during recessions. 1-800-Flowers.com has shown resilience this year, though, seeing just a short downturn from late February to late March 2020 before rallying to new highs in May and June.

3) American Eagle Outfitters (AEO)

This clothing retailer’s stock nearly doubled from early April to early June 2020. Add in American Eagle’s dividend yield of 4.2% and it’s a potential value stock, a dividend stock, and a rising cyclical stock all in one.

4) AutoNation (AN)

It was hard to imagine auto retailers faring well when COVID-19 triggered worldwide lockdowns and threatened hundreds of millions of jobs. A rebound in consumer optimism has turned the tables, though, with AutoNation’s stock nearly doubling from mid-March to early June 2020.

How do I find cyclical stocks?

Various investment websites offer screening tools which let you search for cyclical stocks based on parameters such as earnings growth or the relative price strength of those stocks. You can also find the best cyclical stocks right here, with our lists of top-performing cyclical stocks published every month on this website.

Visit this guide for more information on how to find cyclical stocks > 

Now you’ve learned all about cyclical stocks, it’s time to move onto the next lesson. Click to find out more about non-cyclical stocks, also known as defensive stocks.

By Jonah Keri
Jonah Keri is a trader and analyst who spent 11 years at Investor's Business Daily covering the markets. He now writes about stocks, cryptocurrencies, and other investments for Invezz and about emerging technologies for private clients.
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