Companies can generally be classified in a variety of ways, depending on the goals of the classification system itself. Systems may be statistically or fundamentally based, which would group together companies that have similar valuation metrics, or demonstrate similar market performance traits to one another. In doing so, we generally wind up with a system that defines a company as being either cyclical (one which is heavily exposed to the business cycle), and non-cyclical (those companies that tend to operate independently of the business cycle). Under such a system, we would want to combine cyclical and non-cyclical investments in a way which ensures a fundamental weighting of stable investment returns from the non-cyclical aspect, while still maintaining strategic exposure to the dramatic returns associated with cyclical investments.
Traditionally, cyclical investments tend to be those investments that respond well to increased consumer spending. This includes companies like airlines, commodity producers, and luxury item manufacturers. Alternatively, a non-cyclical industry would represent safer industries, such as consumer staples, utilities, and healthcare providers. However, it is interesting to notice how it is that there can be quite a deal of overlap between these two classifications, suggesting the method might be overly broad for a conservative investor looking to limit risk.
For example, a utility provider is exposed to the costs of the commodities that go into providing its products, meaning that there can be a deal of exposure to business cycles in the costs of the business, even though it is an inherently non-cyclical type of business.
The major short coming of fundamental classification generally shows that the system serves more as an intuitive model for starting to look at the differences between companies than it does an actual model of usage. This is mainly because of the way in which the ability of many of these companies may perform differently depending on which country they are in, and what sort of economic environment they are exposed to. If we hold cyclical stocks that operate internationally, and non-cyclical stocks that only operate locally, are we really creating a robust portfolio?