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Creating a Portfolio Like Warren Buffett: A High-Return Investment Strategy by Jeeva Ramaswamy

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CHAPTER 19

Stock Research Checklist—Cyclical Company

If you looking at a cyclical stock as a possible investment, you need to first understand the company’s cycle and how it relates to the economic cycles. Some companies perform very well when the economy does well and fall rapidly when the economy falls. Those are cyclical stocks.

Do You Understand the Relationship of the Company’s Revenue Cycle in Relation to Economic Cycles in a Cyclical Company?

We can divide goods or services into two different categories: necessities and luxuries. Companies that are involved in creating or providing services as necessities are called non-cyclical companies. For example, food, health care, auto and home insurance, electricity, water, and gas are necessities.

Companies that produce luxury items or services are cyclical companies. People can postpone the purchase of these kinds of products. Cyclical products include automobiles, vacations, jewelry, furniture, and many more.

Cyclical stocks perform well during early economic recovery and economic expansion. Revenue starts to fall during the start of an economic slowdown and during a recession and reaches bottom before the economy starts to recover.

To make money in cyclical stocks, you need to get in at the early part of the recovery, hold the shares until the economy begins to expand, and sell the shares before the economy starts to slow, when the company is in peak. You may lose some of the stock’s upside, but that is acceptable because you ...

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