Cyclical Stock

A cyclical stock belongs to a company whose earnings rise and fall closely with the broader economic cycle, common in industries like autos, homebuilding, airlines, and industrials. Demand for these products and services expands when consumers and businesses feel confident and contracts sharply when they pull back.

Cyclical stocks often look cheapest on a P/E basis right before earnings collapse (because the P in the ratio hasn't caught up yet) and most expensive right before earnings recover, which is the well-known trap of applying a simple valuation screen to a cyclical business without adjusting for where it sits in the cycle.