As the markets move through the normal economic cycle (expansion, peak, contraction, trough) you may find yourself wondering which types of stocks you could invest in. Today we will look at different categories of stocks and classify them with the economic cycle.
Blue Chip Stocks - These are stocks issued by a company that is generally nationally or globally well known with a reputation for quality management, products, and services. These companies have demonstrated a history of paying moderate dividends in good times and bad. Some names include Coca Cola (NYSE; KO), and IBM (NYSE: IBM). many long term investors will utilize a "buy and hold" strategy in all points of the economic cycle.
Growth Stocks - These are stocks that are issued by a company that is expected to have above-average increases in revenues and earnings. It doesn't mean they will, it just means that they are expected to. Generally the companies pay little to no dividend, have high amounts of retained earnings (meaning they are using the earnings for growth and are not usually paying it out to investors), and have a high p/e ratio. Currently some stocks that would fit into that category are Zillow (NYSE: Z) and Solar City (NASDAQ: SCTY)
Cyclical stocks - These are stocks that is heavily affected by the normal economic cycle. A long term investor can expect these stocks to move right in line with the cycle as it happens. Some examples would be Ford Motor Company (NYSE: F), U.S. Steel (NYSE: X) and International Paper (NYSE: IP)
Countercyclical Stock - Countercyclical stocks would be the opposite of cyclical stocks. These stocks will tend to move in the inverse of the economic cycle and can include stocks like Newmont Mining (NYSE: NEM), and Wal-Mart (NYSE: WMT).
Defensive Stocks - Lastly we have defensive stocks, not to be confused with defense stocks. These are companies that are resistance to the normal economic cycles and an investor would expect to see rather stable performance of these stocks no matter the environment. Some examples would include Phillip Morris (NYSE: PM), and Duke Energy (NYSE: DUK)
By understanding the relationship of your stocks to the economic cycle you can better position yourself for the next major move.