Cyclical, Defensive, and Value Stocks
Companies with earnings that are strongly tied to the business cycle are considered to be cyclical. When the economy picks up momentum, these stocks follow this positive trend. When the economy slows down, these stocks slow down, too. Cyclical stocks would include companies like United Airlines (NASDAQ: UAUA).
Defensive stocks, on the other hand, are relatively stable under most economic conditions, no matter how the market is faring. Stocks that fall into this category include food companies, drug manufacturers, and utility companies. For the most part, these companies produce things people can't live without, no matter what the economic climate is at any given time. The list of defensive stocks includes General Mills (NYSE: GIS) and Johnson & Johnson (NYSE: JNJ).
Socially responsible investing has also been popular in recent years. This strategy has people investing only in companies that embody their personal values. Socially responsible investments are often chosen for their “don'ts” more than their “dos.” These corporations don't produce tobacco products, liquor, weapons, or environmentally damaging products.
Value stocks appear inexpensive when compared to their corporate earnings, dividends, sales, or other fundamental factors. Basically, you're getting more than what you pay for: a good value. When investors are high on growth stocks, value stocks tend to be ignored, making them even better bargains for savvy investors. Value investors believe that these stocks make the best buys given their reasonable price in relation to many growth stocks. Of course, a good value is highly dependent on current stock prices, so a good value today might not be a good value next month. A good rule of thumb is to look for solid companies that are trading at less than twice their book value per share. An example of good value (at least as of May 2009) is NYSE Euronext (yes, that's the stock exchange itself), with a price to book value ratio of 0.94.
Income and Speculative Stocks and Green Investing
Income stocks may fit the bill if generating income is your primary goal. One example of an income stock is public utility companies; such stocks have traditionally paid higher dividends than other types of stock. In addition, preferred stocks make excellent income vehicles, typically providing steady dividends and high yields. As with any stock, it's wise to look for a solid company with a good track record.
Beware of speculative stocks. Any company that's boasting about its brilliant ideas but doesn't have the earnings and revenue to back them up would be classified as a speculative stock. Since these companies have yet to prove their true worth, they make risky investments.
Another investment strategy that is growing in popularity is green investing. Here, investors put capital into companies that mirror their personal ethics and values. These investors may be looking to avoid certain negative products (like tobacco and weapons) or companies whose products or services destroy the environment. In the same vein, socially responsible investors look for companies that leave a positive mark on society. Investors look for companies whose interests align with their own social agendas; for instance, they may support companies that promote fair trade or whose products are not made in sweatshops.
