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martes, 13 de enero de 2015

Investment in cyclical companies

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Cyclical stocks are not a good option for long-term investment (understood as "buy and hold") because their benefits history is full of great ups and downs. Is relatively normal that a cyclical company makes the same amount of money today than 10 or 20 years ago, as normal as that one year the firm multiply their profits by 4 to lose money two years later. Because of this their dividends generally suffer the same ups and downs than the benefits.

In bad times the stock prices of these companies suffer real crashes. However during much of the cycle their prices rise more than those of healthy companies. When investing in cyclical companies the goal is as close as possible to buy at the bottom of the cycle and sell at the top. This requires intimate knowledge of the industry to which the firm belongs from the fundamental point of view and/or the use technical analysis tools such as candlestick charts.

No matter how well an investor dominate any of these techniques, there is always the possibility that the analysis and thus the forecast are wrong, so it is necessary to establish an exit strategy if things do not go as expected. If we buy a share in the market for the company's fundamentals we could close the position when these fundamentals are severely damaged or beyond what we had expected. If we entered the market using technical analysis we should set a stop loss based on the price behaviour. The most typical cyclical sectors are airlines, automobile manufacturers, steel mills, paper mills, and companies related to commodities in general.

Examples of cyclic stocks are:

  • General Motors.
  • Walt Disney.
  • Alcoa.
  • 3M.
  • Goodyear.
  • Ford.
  • Hewlett Packard.
  • E.I du Pont de Nemours.
  • FedEx.
  • Dow Chemical

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