The difference between Cyclical and Non-cyclical stocks…!!
Business is always affected by the economic cycle. If an economy is performing well, then most of the business will go up and vice-versa. The stock market is one of the best indicators of the mood of the economy. If the stock market is bullish, it means that the investors are confident about the state of the economy. But In case if the stock market is showing bearish signs, it means that investors are not upbeat about the state of the economy.
There are certain stocks whose performance is completely based upon the growth cycles of the economy. Such stocks are called cyclical stocks.
A cyclical stock moves up and down depending upon the movement in the economy. But there are other types of stocks which performance is never concerned with the growth in the economy. Such stocks are called non-cyclical stocks. For example- Auto, Real estate, Electronics and so forth.
A Non-cyclical stock is a stock, whose performance is minimally affected by upward or downward movement in the economy. It is less sensitive to the broader economic cycle. They are also called defensive stocks, due to their performance in a declining market. To better understand, let’s look at the difference between cyclical and non-cyclical stocks:
|Key Indicator||Cyclical Stock||Non- Cyclical Stock|
|Economy||Perform well in good economy||Might perform well in slow economy|
|Beta||Usually higher than beta 1||Low Beta|
|Dividend||Low Dividend stocks usually||Consistent in paying dividend|
|EPS (Earning Per Share )||Highly volatile EPS||Stable EPS|
Strategies need to follow to invest in Cyclical and Non-Cyclical stocks:
An investor must have a dual combination of both cyclical and non-cyclical stocks. They can take advantage by investing in cyclical stocks during a bullish cycle and vice versa. It helps in diversification. In order to invest in them, an investor needs to follow an investment strategy. There are mainly two main investment strategy, an investor needs to follow:
Top-Down Approach: The top-down approach is looking at the economy as a whole and picking stocks that do well in certain economic conditions. The strategy requires a good understanding of the economy. Afterward, picking the stock based upon correlation with economic growth. For any investor who is investing in cyclical stocks and non-cyclical stocks, it is the most common strategy.
Bottom-Up Approach: The bottom-up approach, on the other hand, involves looking at the stock individually and making investment decisions based upon independent parameters.
*Disclaimer: investment in securities market are subject to market risks, read all the related documents carefully before investing