Definition
Cyclical Stock
A cyclical stock is one whose fortunes rise and fall with the broader economic cycle, booming in upturns and slumping in downturns.
Cyclical sectors, autos, metals, cement, real estate, capital goods, depend heavily on economic growth, interest rates, and consumer spending. Their earnings (and share prices) swing widely between boom and bust, unlike defensive sectors (FMCG, pharma, utilities) that stay relatively stable.
Valuing cyclicals is tricky: they can look 'cheap' on P/E at peak earnings (a value trap) and 'expensive' at the bottom. Skilled investors buy cyclicals near the trough of their cycle and sell near the peak, the reverse of the P/E intuition.
Related terms
- Operating LeverageOperating leverage is the degree to which a company's profits rise or fall with sales, driven by its mix of fixed versus variable costs.
- Defensive StockA defensive stock belongs to a business whose demand stays steady regardless of the economic cycle, offering stability in downturns.
- BetaBeta measures how much a stock tends to move relative to the overall market.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.