Cyclical Stock

A cyclical stock is one whose profits are highly correlated with the business cycle. When the economy is in expansion, a cyclical stock has increased profits. Conversely, when the economy slows, so do the prospects for a cyclical stock. A cyclical stock may be found in sectors such as automobile, travel, or manufacturing. The common thread is discretionary purchases that may be postponed during difficult economic times. For investors with longer time frames, purchasing a cyclical stock during an economic downturn is a classic contrarian strategy. The opposite of a cyclical stock is a defensive stock, one that outperforms during economic downturns. Companies providing consumer staples such as food, hygiene, and medications may have stocks that outperform during economic downturns.