Cyclical companies are companies who are strongly tied to the business cycle and their stocks move sharply up and down when economy turns around. Because of this, they require special handling by the intelligent investor.
Definition of a cyclical company
During recessions and economical downswings the stock market as a whole usually goes down, but a special type of companies suffers most: the cyclicals. Examples for cyclical companies are Caterpillar, US Steel, General Motors and International Paper, all makers of products with a fairly flexible demand curve. Automobile manufacturers, airlines, steel, paper, heavy machinery and hotels are the best examples. Examples for non-cyclical companies are Coca Cola, Proctor & Gamble, and Quaker Oats, all makers of products with a fairly inflexible demand curve. In bad times, people still have to eat and buy stuff for the household. Getting a new car on the other hand, can be delayed for some time.
Marc Thomson, a friend of mine who works at a big bank here in Munich, Germany, said last week: “A lot of our clients feel it now, the recession is hitting them hard. We’ve seen that before in downturns, but as usual, industries like the steel and automobile industry suffer the most and request new credits. ”
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