Most companies dance to general economic rhythms, but while others tango or fox-trot, cyclicals slam dance. The profits of deeply cyclical companies surge in economic upswings and drop--sometimes disappear--during downswings. Moderate cyclicals show more resilience, but their earnings still ebb and flow with general economic tides.
Morningstar uses a broad definition of what constitutes a cyclical: any company that belongs to the industrial-cyclical or consumer-durable sectors, with the exception of firms in our high-yield, distressed, or hard-asset groupings. These stocks include both deep and moderate cyclicals.
Companies become cyclicals because they operate in relatively mature, saturated industries--industries that grow if the economy cooperates. United Technologies UTX is a perfect example. Demand for its aerospace equipment, air conditioners, and elevators fluctuates wildly in developed countries. In good years, the company can clean house. In bad years, it can lose money--a lot of money.
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