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The economy alternates between periods, or cycles, of growth and contraction (aka recession). When the economy moves from contraction to expansion, businesses and governments that had been holding off on construction projects give the go ahead and buildings, bridges and roads are built. Basic materials such as cement and steel will be in great demand. Companies that provide them do well at these times and not so well when the economy slows down. As a result, they are known as cyclical corporations.
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Suitable for
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Investors who watch economic cycles and want to benefit more than usual as a country's economy comes out of a recession.
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Examples
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Alcoa (AA), BASF (BASFY), Caterpillar (CAT), Cemex (CX), PPG Industries (PPG), United States Steel (X), USG Corporation (USG).
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In the news
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Births at 11-Year Low May Prolong U.S. Housing Market's Five-Year Downturn - November 21, 2011.
Caterpillar Earnings Top Estimates as Economy Recovers - October 24, 2011.
Steelmakers Struggle - October 19, 2011.
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Connections
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These corporations are the opposite of what we at Investeens call anti-cyclicals.
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Explorations
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Corporations that provide raw materials and components essential to building and manufacturing have been grouped into their own sector called "basic materials". At Google or Yahoo! Finance, locate this sector. Within this sector are sub-divisions which Google calls sub-categories and Yahoo! calls industries. Review these sub-divisions. Identify one or more which you can argue are not cyclical. For example, Yahoo! Finance has a Gold industry. Gold is expensive and has very few industrial uses, meaning that gold mining corporations should not move up and down with the economy.
In our introduction, we mention that cement and steel are two basic materials. Reviewing the sector and sub-divisions, make a list of five additional basic materials.
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A final word
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The Caterpillar corporation holds a very special place among cyclical stocks. It makes earth moving bulldozers, dumptrucks and the like. If earth is being moved, something is about to be built (or mined) and Caterpillar equipment is going to be in the mix.
Many people wonder how well the world has come out of the economic crisis and recession which officially ended in the middle of 2009. It seems that with every piece of good news there's a piece of bad news right behind it. See The Good, The Bad & the Ugly for more.
What does this have to do with Caterpillar? Well, the investing community has been watching Caterpillar very closely to see what its quarterly performance says about the state of the world-wide economy. The corporation's results have been very strong through 2011, convincing many investors that the worldwide economy will not lapse back into recession.
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