The economy alternates between periods or cycles of growth and contraction (aka recession). When the economy moves from contraction to expansion, businesses and governments that had been holding off on construction projects and other investments give the go-ahead and buildings, bridges and roads are built.

Companies that provide basic materials such as cement and steel will do well when economies expand. Homebuilders are another example of corporations that will see greater demand for new homes when the economy is expanding and less demand if the economy is entering or in recession. As a result, these are known as cyclical corporations.

Cyclical corporations shouldn’t be associated only with construction. Can you name something that you would purchase if you were feeling flush financially, but definitely avoid if money was tight? You’d be identifying a consumer discretionary, a type of product or service that is a luxury you can do without.

Suitable for Investors who watch economic cycles and want to benefit more than usual as a country or region’s economy comes out of a recession.
Examples Lennar Corporation (LEN), Alcoa (AA), BASF (BASFY), (CX), PPG Industries (PPG), United States Steel (X), USG Corporation (USG), Caterpillar (CAT).
In the news U.S. New Home Sales Hit Seven-Month Low as Prices Soar – August 23, 2017

Housing Recovery Checked by Cost Increases, Labor Shortages – May 02, 2013

Builders ready for home construction rebound – March 12, 2012

Births at 11-Year Low May Prolong U.S. Housing Market’s Five-Year Downturn – November 21, 2011.

Caterpillar Earnings Top Estimates as Economy Recovers – October 24, 2011.

Steelmakers Struggle – October 19, 2011.
Connections These corporations are the opposite of counter-cyclicals.
Explorations
  1. Corporations that provide raw materials and components essential to building and manufacturing have been grouped into their own sector called “basic materials”. At Google or Yahoo! Finance, locate this sector. Within this sector are sub-divisions which Google calls sub-categories and Yahoo! calls industries. Review these sub-divisions. Identify one or more which you can argue are not cyclical. For example, Yahoo! Finance has a Gold industry. Gold is expensive and has very few industrial uses, meaning that gold mining corporations should not move up and down with the economy.
  2. In our introduction, we mention that cement and steel are two basic materials. Reviewing the sector and sub-divisions, make a list of five additional basic materials.
A final word

 

 The Caterpillar corporation (symbol CAT) holds a very special place among cyclical stocks. It makes earth moving bulldozers, dumptrucks and the like. If earth is being moved, something is about to be built (or mined) and Caterpillar equipment is going to be in the mix.

Many people wonder how well the world really has come out of the economic crisis and recession which officially ended in the middle of 2009. It seems that with every piece of good news there’s a piece of bad news right behind it.

What does this have to do with Caterpillar? Well, the investing community watched Caterpillar very closely to see what its quarterly performance said about the state of the world-wide economy in the aftermath of the Great Recession. Through the middle of 2012, its performance was strong, giving investors optimism that the world-wide economy would not sink back into recession.