Cyclical Versus Non-Cyclical Stocks

**blast_investor** Wed Apr 12, 2006 11:34 am

Cyclical Versus Non-Cyclical Stocks
What Does Cyclical and Non-Cyclical Mean?

The Concept

The difference between cyclical and non-cyclical industries is simply the difference between necessity and luxury. There are certain items we can't live without and won't likely cut back on even when times are tough. The stocks of companies producing these things are non-cyclical and are "defended" against the effects of economic downturn, providing great places to invest when the economic outlook is sour. For example, household non-durable goods - a fancy term for the things you use up quickly around the house - such as toothpaste, soap, shampoo and dish detergent may not seem like essentials, but you can't really sacrifice them. Most people don't feel they can wait until next year to lather up with soap in the shower.

Contrast this to the new car you've had your eye on. Although it's more exciting to buy a new car than soap, you are more likely to postpone the car for a year or two if your finances feel the effects of an economic slump. Another good example of a cyclical industry is fine dining. When things are good people are more inclined to take the family out for an expensive meal; macaroni and cheese, on the other hand, has to suffice when finances are depressed. Other examples of cyclical industries are manufacturing, the steel industry, travel and construction - the sectors that produce things we can live without when money is tight. These are exactly the types of industries you want to avoid when the economy turns sour.

Charting a Cyclical vs. Non-Cyclical Company

Non-Cyclical Industries - Safety in Turbulent Times

Conclusion

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**blast_investor** Wed Apr 12, 2006 11:53 am

There are 2 types of business cycles. One the economic driven which was described above.

Another type of business cycle is more common and more dangerous for investors. It is competition driven cycle specific to the industry. Each sector/industry would have different length of cycles, short or long. Some maybe very short, 1 or 2 years, others could be very long, 10 to 40 years a cycle.

Because value investors are mostly long term oriented, the business cycle must be considered.

Unfortunately, most stocks are cyclical in certain degree. Very few companies can escape from cyclical nature of competition in the free market.