The Different Kinds of Companies

The fool.com describes the different kinds of companies in this primer.

In your reading, you'll run across many terms used to describe different kinds of companies. Here are some of the most common ones:

"Cyclical" companies are defined by how their businesses react to economic change. During recessions, people spend money more conservatively, putting off major purchases such as cars and refrigerators. Thus, manufacturers of large appliances are cyclical. Companies such as pharmaceutical firms that aren't so affected are "defensive." If you're taking heart medication, you're not going to stop because of an economic downturn.

"Seasonal" companies experience significantly different levels of business at various times of the year. Department stores, for example, see sales surge during the Christmas season. Swimming pool companies operate mainly in the summer.

"Blue chip" companies have been around a long time and are known for being solid, relatively safe investments. They're steady growers, usually paying dividends. Examples: General Electric, ExxonMobil, Johnson & Johnson. At the other end of the spectrum are "speculative" stocks, typically tied to young, relatively unknown and risky companies. Many promise great things but have yet to prove themselves. Examples include gold mines or companies trying to develop cures for cancer.

"Growth" stocks, favored by aggressive investors, grow faster than the market average. They often don't pay any dividends, using their cash to continue growing. Their stock prices often go up -- and down -- quickly. Some examples: Amazon.com, eBay. (Railroad and telegraph businesses were growth companies once -- fortunes change over time.)

"Value" stocks are favored by investors looking to buy the proverbial dollar for 50 cents. They seek promising companies that are out of favor.

"Income" stocks may not grow too quickly, but they pay fat dividends. In pre-deregulation days, utility companies reliably paid high dividends. Today many real estate companies do. Income stocks are often favored by those in or near retirement, who rely on the dividends to supplement pensions or savings.
Note that many companies will fit into several categories, and savvy investors will often seek firms with several characteristics, such as those that are both growing and valued attractively.

Peter Lynch places companies into one of six general companies: slow growers, stalwarts, fast growers, cyclicals, asset plays, and turnarounds.

• Slow Growers: Large and aging companies expected to grow only slightly faster than the U.S. economy as a whole, but often paying large regular dividends. These are not among his favorites.
  
• Stalwarts: Large companies that are still able to grow, with annual earnings growth rates of around 10% to 12%; examples include Coca-Cola, Procter & Gamble, and Bristol-Myers. If purchased at a good price, Lynch says he expects good but not enormous returns--certainly no more than 50% in two years and possibly less. Lynch suggests rotating among the companies, selling when moderate gains are reached, and repeating the process with others that haven’t yet appreciated. These firms also offer downside protection during recessions.
  
• Fast-Growers: Small, aggressive new firms with annual earnings growth of 20% to 25% a year. These do not have to be in fast-growing industries, and in fact Lynch prefers those that are not. Fast-growers are among Lynch’s favorites, and he says that an investor’s biggest gains will come from this type of stock. However, they also carry considerable risk.
  
• Cyclicals: Companies in which sales and profits tend to rise and fall in somewhat predictable patterns based on the economic cycle; examples include companies in the auto industry, airlines and steel. Lynch warns that these firms can be mistaken for stalwarts by inexperienced investors, but share prices of cyclicals can drop dramatically during hard times. Thus, timing is crucial when investing in these firms, and Lynch says that investors must learn to detect the early signs that business is starting to turn down.
  
• Turnarounds: Companies that have been battered down or depressed--Lynch calls these "no-growers"; his examples include Chrysler, Penn Central and General Public Utilities (owner of Three Mile Island). The stocks of successful turnarounds can move back up quickly, and Lynch points out that of all the categories, these upturns are least related to the general market.
  
• Asset opportunities: Companies that have assets that Wall Street analysts and others have overlooked. Lynch points to several general areas where asset plays can often be found--metals and oil, newspapers and TV stations, and patented drugs. However, finding these hidden assets requires a real working knowledge of the company that owns the assets, and Lynch points out that within this category, the "local" edge--your own knowledge and experience--can be used to greatest advantage.

I see that this Lynch page is on the web page of Peter A. Ammermann, Assistant Professor of Finance at Long Beach State. The content though was written by Maria Scott Crawford for the AAII Journal (she is or was the editor of the Journal). She also wrote an overview of Philip Fisher.