When to Buy Cyclical Stocks?

Cyclical stocks are stocks that fluctuate up and down based on economic factors. These stocks go through cycles of good and bad during their life as securities. Investors can potentially make substantial returns by investing in these types of stocks at the right time. At the same time, choosing the wrong time to invest could prove costly.

Cyclical Stocks

There are many different industries that could be considered cyclical. Cyclical stocks are security that tend to do poorly when the economy is suffering and do very well when times are good. They tend to reflect the overall condition of the stock market. Therefore, you can usually see what they are doing by looking at a stock market index such as the S&P 500. 

Buy Low

The old adage of "buy low and sell high," was never more appropriate than when talking about cyclical stocks. If you are interested in purchasing this type of stock, you need to do so when the market is down. Since these stocks tend to reflect the condition of the economy overall, you want to look for times when the economy is not performing very well. You should have no problem spotting these times as the stock market will be down and every media outlet will be reporting on the economic downturn. When the market is down, this makes one of the best times to invest in cyclical stocks.

As long as the company is financially sound and it can get through the tough times, it should rebounded nicely when the economy starts to pick up. You want to get in while other investors are on the sidelines and the prices of the stocks are low. Then when things start to pick up, other investors will come back and drive the price of your stocks up.

Fundamentally Sound Companies

Even though investing in cyclical stocks during a down economy makes a lot of sense, this is not the only time that you should consider investing in them. Even when the market is already doing well, there are still opportunities to invest in these companies. Once the economy starts to pick up, it might do well for many years. If you sit on the sidelines during these good times, you will potentially miss out on a lot of profits.

If you will do some research, you can find companies that are undervalued in the market even when times are good. You may not be able to make as much money as you could by buying in a down market, but you will still be able to make a decent return. Look at the financial ratios of a company. You can use several valuation multiples in order to determine if a company is valued appropriately. If you find a company that is trading below other competitors in the industry, do not hesitate to pull the trigger on a purchase of stock.