[[Start here]] → [[What works in stocks?|what works]] → [[diversify for resilience|diversity]] → [[there are six different categories of winning stocks|classifications]] → cyclicals --- ![[cyclical.png]] Peter Lynch stated in [[Lynch - One Up On Wall Street|One Up On Wall Street]] that [[there are six different categories of winning stocks]]. Cyclicals are one of them. ## About Cyclicals - Unlike growth stocks, cyclical business expands and contracts rhythmically. - Autos, airlines, steel, chemicals, defense etc. - Cyclicals flourish coming out of recessions. Prices move faster than defensives. - But you can lose more than 50% in downturns, can take years to recover. - The most misunderstood type of stock, and a trap for the unwary. Often very well known blue-chip companies, so are often mistaken for [[Stalwarts]]. ## How to deal in cyclicals - Timing is everything. To get an edge you have to know the industry. - New entrants to the industry can be dangerous. - Monitor inventories closely. - Expect P/E to shrink as price rises (investors anticipate next decline). - "The worse the slump in the auto industry, the better the recovery" > [!quote] > Charts of the cyclicals look like polygraphs of liars, or the maps of the Alps. ## Typical two-minute monologue > There has been a 3 year business slump in the auto industry, but this year things have turned around. I know because car sales are up across the board for the first time in recent memory. I notice that GM's new models are selling well, and in the last 18 months the company has closed 5 inefficient plants, cut 20% off labor costs and earnings are about to turn sharply higher. ## When to sell a cyclical - Sell at the end of the cycle. But when is that? - Sell when something has started to go wrong. Costs are up, factories at capacity, overinvestment in new capacity. - Sell when inventories are at highs and not dropping. - Sell when commodity prices are falling. - Cost cutting doesn’t seem to be making the firm competitive. [^1]: [[Lynch - One Up On Wall Street|One Up On Wall Street]] - Lynch p. 119