If you're going to be an involved investor, you need to know certain things. For example, you know what market capitalization is, right? (If not, no problem -- learn that here.) Here's a topic for today, though: the relationship of various kinds of companies to the economy. This relationship can be described in three main ways:
Cyclical companies
You probably know about cyclical companies. They tend to have very lumpy performances, often doing well when the economy is doing well, and then not so well when the economy is sputtering. They include carmakers such as Ford (NYSE:F) and refrigerator makers such as Whirlpool (NYSE:WHR). You might covet a new car or fridge, but if you're afraid your husband is going to lose his job, you'll probably put off the purchase. A less obvious cyclical company is one that supplies the more obvious ones. For example, semiconductor companies make components of computers and telecommunication equipment, which are tied to the economy, at least to some degree. So Applied Materials (NYSE:AMAT), for example, is rather cyclical.
Noncyclical companies
Then there are the not-so-cyclical companies, also known as "defensive" companies -- because they can defend your portfolio against down swings tied to the economy. (Not completely, of course.) An example would be utility companies, tobacco companies, soft drink makers, and pharmaceutical companies. We might be in a protracted recession, but odds are you'll keep sipping sodas, taking your pills, turning on light bulbs, and smoking (if you're a smoker). Thus, companies such as Schering-Plough (NYSE:SGP) and Altria can be considered noncyclical.
Countercyclical companies
Finally, here's a category that relatively few investors think of: countercyclical companies. They're ones that are expected to do well when the economy is not doing well. There isn't always full agreement on which companies and industries fit this bill, but those that get mentioned include alcohol, discount retailers, and temp agencies. Thus, Anheuser-Busch (NYSE:BUD) and Manpower (NYSE:MAN) could be considered countercyclical. One might even include prisons, as desperate times might lead more people to desperate measures, and many prisons are now operated by public corporations such as Corrections Corp. of America (NYSE:CXW).
So next time you're examining your portfolio, ask yourself how many cyclical, noncyclical, and countercyclical companies you have. It's not the most important factor related to your ultimate success, but if you're heavily weighted in one kind of company, you might be in for a surprise if the economy heads to an extreme.
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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Try any one of our investing services free for 30 days. The Motley Fool is Fools writing for Fools .
