DEFINITION of 'Smokestack Industry'
Heavy manufacturing industries with factories that generally have banks of chimney stacks emitting smoke into the atmosphere. A smokestack industry is usually viewed by investors as an "old economy" business, with limited potential for long-term growth. Smokestack industries typically include automobiles, chemicals, steel and shipbuilding - in short, any heavy manufacturing industry that has been around for decades.
BREAKING DOWN 'Smokestack Industry'
Smokestack industries are generally perceived as having a high degree of cyclicality, since their fortunes are typically dependent on the state of the broad economy. Most smokestack industries have substantial levels of debt that can be detrimental to performance when the economy slows down.
During periods of economic expansion, smokestack industry stocks perform well, delivering healthy levels of earnings and cash flow. However, as cyclical industries, they tend to under-perform during recessionary times, due to significant declines in revenues, earnings and cash flow.
Astute investors tend to bail out of smokestack industries when the economy shows signs of slowing down and heading for a recession, and get back into them when the economy displays signs of an imminent rebound.