Classification of industry for fundamental analysis
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Growth Industries: A sector of the economy experiencing a higher-than-average growth rate. Growth industries are often associated with new or pioneer industries that did not exist in the past and their growth is related to consumer demand for the new products or services offered by the firms within the industry. If companies across and industry exhibit solid earnings and revenue figures, that industry may be showing signs that it is in its growth stage. Growth industries tend to be composed of relatively volatile and risky stocks. Often investors must be willing to accept increased risk in order to take part in the potentially large gains offered by stocks within a particular growth industry.
Cyclical Industries: A type of an industry that is sensitive to the business cycle, such that revenues are generally higher in periods of economic prosperity and expansion, and lower in periods of economic downturn and contraction. Companies in cyclical industries can deal with this type of volatility by implementing cuts to compensations and layoffs during bad times, and paying bonuses and hiring en masse in good times. Cyclical industries include those that produce durable goods such as raw materials and heavy equipment For example, the airline industry is a fairly cyclical industry; in good economic times, people have more disposable income and, therefore, they are more willing to take vacations and make use of air travel. Conversely, during bad economic times, people are much more cautious about spending. As a result, they tend to take more conservative vacations closer to home (if they go at all) and avoid expensive air travel.
Defensive Industries: Defensive industries are those, such as the food processing industry, which hurt least in the period of economic downswing. For example- the industries selling necessities of consumers withstands recession and depression. The stock of defensive industries can be held by the investor for income earning purpose. Consumer nondurable and services, which in large part are the items necessary for existence, such as food and shelter, are products of defensive industry.
Cyclical-growth Industries: These possess characteristics of both a cyclical industry and a growth industry. For example, the automobile industry experiences period of stagnation, decline but they grow tremendously. The change in technology and introduction of new models help the automobile industry to resume their growing path.