Cyclical Stock
A share whose earnings rise and fall with the economic cycle, typically in sectors such as metals, cement, autos and construction.
How it is identified
Test: earnings correlate strongly with GDP growth, commodity prices or credit conditions, with wide peak-to-trough swings
Unit
qualitative
In depth
Cyclicals invert the usual reading of the price-to-earnings ratio: they look cheapest at the top of the cycle, when earnings are at their peak and the multiple is at its lowest, and most expensive at the bottom. Buying a cyclical on a low P/E is therefore often the exact opposite of buying cheaply. Analysts address this with normalised or mid-cycle earnings, or by using price-to-book instead, which is far more stable across a cycle. Operating leverage is the mechanism: high fixed costs mean a modest change in volume produces a violent change in profit.
Worked example
A steel company earns ₹100 per share at the cycle peak and trades at ₹800, a P/E of 8. At the trough it earns ₹10 and trades at ₹400, a P/E of 40. The 'expensive' price of ₹400 was the better entry; the 'cheap' P/E of 8 was the warning.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Cyclical Stock” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.