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Cyclical stocks are often considered an offensive tactic in investing. You use them to hopefully generate high returns as fast as possible when the economy expands. Auto manufacturers, clothing stores, hotel and travel, airlines, retail stores and luxury goods manufacturers are classic cyclicals. Why? When the economy is booming, consumers are more likely to remodel their home, take a vacation, buy a new car or buy that expensive handbag.
Here are 5 consumer cyclical stocks you should have your eyes on.
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Overview: Consumer Cyclical Stocks
Consumer sectors are divided into 2 categories: defensive and cyclical. Defensive includes habitual and staple items, like groceries, liquor and bulk commodities. Cyclical comprises financials, technology, industrials and consumer discretionary items.
Cyclical stocks are sensitive to economic movements and their prices and profits are impacted by business and the health of the economy. The stock of companies in the cyclical sector may suffer decreased profits and typically lose market value during an economic hardship as people try to reduce unnecessary expenses. Share prices and profits can rebound sharply when the economy gains strength — people have more disposable income to spend.
Because cyclical stocks reflect the business sentiment of the economy, you may be able to gauge its general direction by understanding the movement of cyclicals. When interest rates fall, these stocks typically have better valuations — which are a massive boost.
Best Online Brokers for Consumer Cyclical Stock
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Intermediate Traders and Investors
Features to Look for in Consumer Cyclical Stock
Here are a few indicators based on which you can assess a cyclical stock.
- Earnings per share (EPS) is the amount each share would receive if a company paid out all profits to shareholders. It reveals how companies in the same industry compare. Look for stocks with a pattern of earnings growth and a habit of reinvesting a significant fraction of earnings in the growth of the business. You can find a company’s earnings per share ratio on its annual financial report.
- Market share growth is a fundamental goal for most consumer cyclicals. Most companies aim at boosting their sales at a quicker pace than their competition. While some stocks disclose their actual market share, investors often judge a company’s growth rate by how it stacks up against its competition. A persistent, dominant market share implies sales growth and higher profit margins year after year.
- Dividend yield is a stock’s dividend reported as a percentage of its share price. If a share of stock is selling at $50 and the company pays out $2 per year in dividends, then its yield is 4%. Besides generating income for the shareholders, dividends are a good indicator of a company’s strength compared to its competition. A history of rising dividends tells of a strong company that maintains payouts at all times.
Track the Consumer Demand With Cyclicals
Ultimately, cyclical stock investing is a game of patience, and the range of stocks goes beyond the 5 companies described above. But if you’re interested in adding some exposure to a high-growth segment of the economy, these stocks are a good starting point. Closely monitor economic events to better understand which industries are on the road to recovery. Based on this information, you may consider trimming or adding your positions.
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