Let us understand the typical cyclical stock with an example. Say, you purchased a large quantity of Hindalco, which is an aluminium manufacturer. The attractiveness will depend on factors like new aluminium demand, price of the metal in the global market, the cost of inputs etc. Now if China decided to spend heavily on infrastructure then it will lead to heavy demand for infrastructure. That means aluminium stocks could go up in price. At the same time, if the input costs of aluminium start seeing an uptrend that is not great news for these stocks. You need to be cautious in such cases. They are actually called cyclical stocks because they go through long cycles lasting for 8-10 years. During the up cycle these stocks can substantially outperform but during the down cycles these stocks can substantially underperform the markets. That is why they are called cyclical. Their mean performance cannot be too indicative of how attractive the stock is.

Cyclical stocks normally perform in tune with the global or domestic cycles. In terms of stock market performance, these cyclicals tend to outperform in the upward phase of the cycle but grossly underperform in the downward phase of the cycle. For example, stocks like L&T and BHEL are largely dependent on the capital cycle in the economy and therefore will outperform when the capital investment cycle in on an upturn. That explains why L&T underperformed between 2012 and 2016. Similarly, stocks like Tata Steel and Hindalco are heavily dependent on the global demand and price cycle of steel and aluminium respectively. That explains why these two stocks have done so well in the last 1 year when Chinese demand has been on an upturn and prices on the LME are moving up.