
The Only Tech Stock You Need to Buy in 2021
This stock gives investors the opportunity to take advantage of diverse tech trends.
Some stocks are quite vulnerable to recessions and economic slowdowns, while others are well positioned to maintain their profits in any economic climate. This is the basic idea behind the concept of cyclicality.
We're seeing cyclicality play out firsthand in many areas of the stock market during the COVID-19 pandemic. With all that in mind, here’s what investors should know about cyclical stocks, some examples of cyclical industries and stocks, and how you should use this concept in your investment strategy.
A cyclical stock is one whose underlying business generally follows the economic cycle of expansions and recessions. Cyclical businesses perform well during economic expansions but typically see sales and profits fall significantly during recessions and other rough economic times.
Cyclical stocks tend to move up and down in value alongside the market.
It’s not practical to list every cyclical industry, but to give you a good idea of some of the major types of cyclical industries, here are eight of the most prominent and easy-to-understand examples:
Obviously, though, every recession and economic downturn is different. In the COVID-19 pandemic, many types of companies mentioned above -- banks and retailers, for example -- have taken a hit. However, because of the nature of the pandemic, technology stocks have performed incredibly well, as many have either been largely unaffected or have actually benefited from things like stay-at-home orders.
Some types of businesses aren’t affected much by economic cycles. These are also known as defensive stocks, as they tend to do nearly as well during rough economies as during expansions.
We already mentioned that non-discretionary retail -- companies that sell things people need -- tend to be rather defensive in nature. In addition to big-box retailers like Walmart, drugstores and grocery stores also fit into this category.
In addition to some retail, utilities stocks tend to be highly defensive, as consumers (for the most part) continue to pay their electric and water bills even during the deepest recessions. Real estate is another sector that is considered defensive, although the level of defensiveness depends on the nature of the company’s property focus. For example, real estate investment trusts (REITs) that focus on office properties or hospitals usually perform better in difficult economies than those that own hotels.
That said, cyclicality largely depends on the nature of the recession or downturn. Many types of REITs rely on businesses being open, so real estate has generally underperformed during the COVID-19 pandemic.
To give you some concrete ideas of the types of stocks we’re talking about, here are a few common cyclical and defensive stocks:
Cyclical Stocks
Defensive Stocks
To be clear, none of the companies on these lists are perfectly cyclical or perfectly defensive. Depending on the circumstances of a recession, some of the cyclical names could do relatively well, and some of the defensive stocks could see profits decline significantly. However, these are good examples of stocks that are generally cyclical and defensive over time.
In a perfect world, a good investment strategy might be to buy cyclical stocks at the start of an economic expansion and sell them just before a recession begins. Unfortunately, trying to predict the timing of a future recession (or expansion) is a losing battle.
Therefore, it’s a smart idea to own a combination of both cyclical and defensive stocks in your portfolio. That way, you’ll be well positioned to prosper when the economy is growing, but will have some downside protection when the economy takes a turn for the worse.
This stock gives investors the opportunity to take advantage of diverse tech trends.
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