This article continues our look at investment cycles. For background on how economic and industry cycles differ, read Understanding Economic & Industry Cycles.

Several companies covered in the SmallCap Informer provide real-world illustrations of how overlapping economic and industry cycles play out on corporate financial statements. Consider Nova Ltd. (NVMI), an established provider of advanced metrology and process control equipment utilized across major integrated circuit segments, including logic, foundry, and memory.

Metrology tools are indispensable for monitoring product yields and defect levels as chip geometries shrink and three-dimensional architectures multiply. Because Nova’s tools sit at the front lines of chip manufacturing, the company participates directly in the industry’s capital investment cycles. When chipmakers commit to building new fabrication facilities or upgrading leading-edge nodes, Nova benefits from robust demand.

Yet, as documented in company analyses, the massive capital required to fuel the semiconductor industry’s cycle of innovation and obsolescence means that participant businesses can see their operational fortunes rise and fall over relatively brief spans of time, with revenues and net earnings varying materially from quarter to quarter and year to year.

Similarly, inTest Corp. (INTT) showcases the divergence between specific industry segments and company-level diversification strategies. As a supplier of specialized testing equipment and thermal solutions, inTest operates across the semiconductor manufacturing value chain. However, within the semiconductor universe, different segments can experience desynchronized cycles. During cyclical adjustments, front-end semiconductor manufacturers may experience weak order levels due to short-term industry capacity overhangs in areas such as silicon carbide crystal growth, even while back-end testing and packaging operations begin to stabilize.

To counteract the sharp cyclicality of pure semiconductor manufacturing, small suppliers frequently pursue deliberate diversification into adjacent industrial end-markets, deploying their induction heating and thermal test tools into automotive and electric vehicle manufacturing, life sciences, and aerospace applications.

The photomask specialist Photronics reveals another dimension of industry cyclicality: the divergence between leading-edge technology migration and mature market capacity.

Photronics (PLAB) produces photomasks used to transfer circuit patterns onto wafers for integrated circuits and flat panel displays. Because photomasks are required whenever a chip design changes rather than solely when production volumes expand, Photronics possesses structural exposure to engineering innovation roadmaps, such as advanced node migrations and the shift toward larger form-factor display panels. Even during cyclical industry pauses when mainstream commodity chip production softens, research and development design activity for high-end artificial intelligence chips and new node introductions can remain exceptionally resilient.

In addition, geopolitical actions and government funding initiatives, such as the CHIPS and Science Act and global supply chain regionalization, inject cross-currents that can stimulate regional semiconductor investment even during broader cyclical lulls.

Other covered suppliers, such as this month’s featured company Fabrinet (FN), reflect these operating realities within specialized operational niches. Fabrinet provides advanced optical packaging and precision manufacturing services for complex datacenter interconnect and high-performance computing modules.

Its production schedules must absorb lengthy customer qualification cycles of three to six months, single-source raw material dependencies, and supply chain bottlenecks that amplify cyclical fluctuations. Fabrinet’s results will typically reflect the impact of these nearer-term factors and should not be misidentified as long-term growth obstacles.

Opportunities in Cyclical Downtrends

For the fundamental investor, the central lesson of cyclicality is that the inconsistency of reported operational results from quarter to quarter must not automatically be branded as structural problems. Instead, cyclical downswings may well present attracted entry points for disciplined purchases.

As the market attempts to dynamically recalculate valuations for cyclical businesses, it routinely overcorrects. During industry troughs, when quarterly revenues decline and short-term earnings multiples temporarily inflate due to depressed trailing profits, market sentiment often becomes excessively pessimistic, discounting high-quality balance sheets and leading market shares.

At cyclical peaks, inexperienced investors may extrapolate peak operating margins indefinitely, driving price-to-earnings multiples into overextended territory.

By maintaining a rigorous focus on pre-tax profit margins, pristine balance sheets, and manageable debt, an investor can confidently identify well-managed small companies that possess the financial durability to survive industry downturns and gain market share before the next inevitable cyclical upswing arrives.

Over time, market sentiment oscillates between enthusiasm and fear, but the underlying fundamental earnings power of a well-run business remains the ultimate factor that determines investment success.

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You may have noticed that this issue is being delivered earlier in the month than in the past. In order to align the production cycles of our three investing newsletters—Investor Advisory Service, Dividend Informer, and SmallCap Informer—we are moving SCI’s publication date to the third Friday of the month.

In the October 2026 issue of the SmallCap Informer, we present subscribers with two companies to consider. The first is a micro-cap business that is a leader in a healthcare area that impacts hundreds of thousands of Americans.

Our second focus stock is a return to one of our most successful picks, an electronics company that has seen shares pull back amidst near-term uncertainty regarding data center buildouts but still represents an excellent long-term opportunity.

Stay the course!

— DOUG GERLACH 

Subscribers can read Doug's complete commentary and the in-depth profile of our recommended small company stock in the current issue of the SmallCap Informer stock newsletter. Not a subscriber? Subscribe to the SmallCap Informer and get monthly small company stock recommendations and updated buy/sell prices for each of the ~40 high-quality small company stocks currently covered in the newsletter.