Cyclical stocks have regular rises and falls in price, usually tied to business or economic cycles. Cyclical sectors like resource and energy stocks are subject to wide and unpredictable swings. In the rising phase of the business cycle, when business is booming, resource demand expands faster than resource supply, so resource prices shoot up.
This expands profits at resource companies. But when the economy slumps, commodity prices fall, and this drags down profits and stock prices. This highly cyclical sector has gone through many booms and busts. It’s only now showing signs of recovery after its recent slump as prices of oil and most other commodities rebound from multi-year lows.
Note that it’s far better to buy these and other cyclical stocks when their p/e’s are in the middle of the historical range—neither too high nor too low. (The main exception is when their earnings have collapsed and driven their p/e’s sky-high. This is often the best time to buy cyclicals, since it coincides with a low in their earnings.)
Some investors feel resource stocks could languish for years—and that you should stay out of them until inflation moves up substantially. But these stocks could give us an early warning of coming inflation. They may shoot up long before inflation revives.
When times are good, investors in cyclical stocks sometimes ignore investment drawbacks and pitfalls. When times are bad, many investors pay too much attention to risk.For advice on when to buy resource and other cyclical stocks, follow TSI Network and use our three-part Successful Investor strategy:
Invest mainly in well-established companies;
Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
Downplay or avoid stocks in the broker/media limelight.
Cyclical stocks can experience drastic swings—so use our Successful Investor approach to help pick them wisely
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