Do I Know About Catalysts Anyway?
My name is
Nathan Slaughter, and I'm the editor of the
StreetAuthority Market Advisor.
I've studied catalysts for some time now, and I'm convinced that using
catalysts to plan your investment decisions is one of the smartest moves
you can make. In fact, it's one of the reasons why my "Top
Portfolio is topping the broader market four-fold (more on this
As you can tell from the example above, the secret to making money in
stocks isn't just finding a great company. General Electric (NYSE:
GE) is a great
company. It has its hands in a number of industries... it's the "bluest"
of the blue chips... and it considered about as American as apple pie.
Ditto for companies like Microsoft (Nasdaq: MSFT),
Pfizer (NYSE: PFE) and Intel (Nasdaq: INTC).
But I can't stress this enough: Great companies don't always
Don't believe me? Just look at the numbers.
All great companies... all
tepid (at best!) returns. This is what happens to stocks without strong
I've bandied about this term catalyst since the start of this course,
but you might still be wondering just exactly what I mean.
If you remember your high school chemistry, catalysts are agents that
speed reactions between substances. It works the same way in investing.
A stock catalyst is something that creates a dramatic impact on a
company's fortunes... and triggers a sudden rush into its stock.
When the right catalyst hits a stock, the Wall Street machine
kicks into gear and investors flock to it in droves, furiously driving
up the price.
Catalyst-driven stocks are like coiled springs, itching to explode.
But too many investors fail to appreciate catalysts and let them power
their portfolio to gains. I want to put an end to that.
After reading this course, I know you'll see that investing in
stocks powered by catalysts isn't just a better way to invest. If you
want to make money, it's darn near the only way to invest.
The good news is that no matter your investment style -- whether you
trade in and out of stocks or hold for the long term... invest for
income or in value stocks... buy stocks for now or for retirement --
investing with the power of catalysts can help improve your returns.
But before you can profit from catalysts, you need to know where to find
them. In our next section, I'll dive into the market's strongest
catalysts and also include some specific ideas that could allow you to start
Five Catalysts For Today's Market
I have some
good news... investing with catalysts is not hard, and the
profit potential is unmatched. Truth is, catalysts are being created
every single day -- you just need to know where to look. That's why I
want to teach you the most popular catalysts. By knowing what to look
for, you're taking your first step to profiting from one of the
most powerful forces in investing.
To be honest, catalysts
come in all shapes and sizes. But you can drive yourself crazy trying to
identify each and every one. That's why I tend to focus on the "major"
catalysts -- I've identified five categories that encompass the
majority of catalysts driving stocks higher.
Catalyst One: A Surprise Takeover Announcement. Sun Microsystems was one of the
high-flyers during the late 1990s tech boom. But by March of 2009, Sun's
shares were languishing under $5 and rumors abounded that the one-time
tech darling was looking for a suitor.
In late March, sources leaked news of late-stage
negotiations between Sun and tech giant IBM (NYSE: IBM). While terms of the deal were unclear, it
appeared IBM was looking to pick up Sun for around $9 per share. Investors
who owned the stock in mid-March before the deal was announced made a better
+100% gain nearly overnight as news of the negotiations broke.
But the story didn't finish with IBM. A few weeks later, the IBM deal fell
through as the company tried to lower its acquisition price and Sun's board
balked at the lower offer. The word was that another buyer was waiting in
the wings with a slightly sweeter payout for the company. Sure enough, in
late April, software giant Oracle took advantage of the confusion to offer
Sun $7.4 billion in an all-cash deal, a premium to IBM's bid.
The result: shareholders who bought Sun at the beginning of March -- just before IBM started bidding
for the company -- enjoyed better than +100% gains in just about six weeks.
Strong gains are common for mergers, leveraged buyouts (LBOs),
and takeovers, because mergers must be approved by the owners of a company
-- the shareholders -- and those owners need to be tempted by an acquirer to
sell their stake.
Ernst and Young state that the average takeover premium in
the U.S. over the long run is around +24%. That means
investors in the takeover target make an average profit of
+24% by the time the deal closes, with much of that gain
coming in the first few days after a takeover is announced.
This can be even more lucrative in the event that there are
multiple parties interested in acquiring a particular firm,
as evidenced by the Sun Microsystems deal. But to make a
long story short, if you can identify stocks that are likely
takeover candidates, then you stand to post big gains when a
deal is ultimately announced.
How to Pinpoint Stocks Waiting for "Surprise" Takeovers
But I know what you're thinking... if a takeover announcement is a
"surprise," how in the world can you get in before the announcement?
Let's get one thing straight -- unless you're an insider in a company,
there's no way to be sure that a takeover announcement is coming. But
what you can do is put the odds in your favor. You see, there are a few
clues that you can use that are usually strong signals that a takeover
These clues include: companies within an industry with strong
deal-making activity, firms that are fundamentally strong, those with
low debt levels and strong cash flows, and companies that hold valuable
assets such as patents, land, or state-of-the-art factories.
Companies with these attributes make attractive takeover targets... which is one of the strongest -- and fastest-acting -- catalysts on the
Improving Business Conditions. For years, Caterpillar's (NYSE: CAT) stock
plodded along as slowly as the familiar yellow tractors it builds. But
when the bull market in commodities kicked off in 2003, it was like CAT
became a whole new business.
Caterpillar's lineup of machinery,
including a $5 million dump truck -- a 22-foot tall and 48-foot long
beast that can slog uphill with 400 tons on its back -- was essential to
the mining and energy sectors. Soaring commodity prices during that time
triggered a rush for its products like never before.
The improving business conditions proved to be a strong catalyst for
Caterpillar... and proof that catalysts don't only impact tiny, growing
companies. Instead, catalysts can create an incentive to invest in some
of the market's oldest and most-storied businesses.
In the case of CAT, the improving business conditions thanks to the bull
market in commodities such as coal, oil, and gold helped to power the
company and its stock higher. But then the recession hit. Much of the
gains were wiped out.
until commodities returned to their bull market after the worst of the
recession. You can see from the chart what happened then when the
company once again had rising commodity prices acting as a tailwind.
There's no doubt that improving business conditions can be open to some
wide interpretation. That's why you want to make sure that the improving
conditions are based on factors directly benefiting the company -- not a
general improvement in the overall economy.
With this in mind, I've identified one stock that could be a trajectory similar to
Caterpillar's historic run. With the sharp recession and higher unemployment, shares of payroll processor and employment services
company Paychex (Nasdaq: PAYX), might seem like an odd
investment. But I think the company is sitting in the sweet spot for
improving business conditions.
Rising employment is always one of the last signs of an economic
recovery. But with the recession abating, the months and years ahead
should see decreases in unemployment rates -- leading to boom times for
companies tied to employment, such as Paychex.
Catalyst Three: A Killer New Product or Market. Apple (NYSE:
AAPL) was a marginal computer company with
a user base of students and designers devoted to its elegant products
and easy-to-use software. But on October 23, 2001, Apple introduced a
portable music player that could hold an enormous amounts of songs in a
Of course, we now know this device as the ubiquitous iPod.
Don't think that Apple invented the digital music player. Similar
devices had already been around for a couple of years. But no other
company was able to turn the music player into a "must-have"
product the way Apple did with the iPod's ease of use and attractive
This extreme catalyst, in which Apple practically created a market that
it still dominates, has added tens of billions of dollars to the firm's
market cap. About 300 million iPods have now been sold, and after
the product hit store shelves, Apple shares shot from about $18
(split-adjusted) to over
But Apple wasn't done there. It has been able to continue making killer
new products that turn into big hits. This includes the iPhone and the
But I didn't need to tell you about Apple's story. Not only did you
likely know it already, but you saw the impact of having a killer
new product earlier in this course when I introduced you to Green
Mountain Coffee Roasters.
To be sure, stocks with great new products or markets is one of the
harder-to-find catalysts -- but when you do... look out above.
Gaining a new market is the strongest catalyst behind Skyworks
Solutions (Nasdaq: SWKS). This company is a leading provider of
semiconductors that facilitate mobile connectivity. Translation: It
makes the chips that power mobile devices -- anything from smartphones
to Apple's iPad.
Needless to say, business has been strong and the shares have responded
accordingly. But with the adoption of smartphones still in full swing
thanks to products like the iPhone, Skyworks looks like it's still early in its catalyst cycle.
That's why I hold it in my
Market Advisor portfolios.
The government is by far the biggest player
in our economy. Like a whale in a pond, it sends shock waves through the
economy with its every move.
These waves create tsunamis of cash that inject
billions of dollars into companies in the right place at the
We see it again and again. Whenever Washington decides to help a new
industry get off the ground, the investment profits follow in lockstep.
This holds true whether it's the Internet, nanotechnology, wind power,
electric cars or any other area.
Amgen's (Nasdaq: AMGN) epic stock gains would never have happened
if the government hadn't
invested heavily in biotechnology in the 1980s.
It was a government
scientist in fact, working in partnership with Amgen, who made the discovery
that led to Amgen's first blockbuster drug.
Anyone who wanted to make a play on Amgen's government
connections in the 1980s could have bought in at $7.75 a
share. A thousand-share, $7,750 purchase would now be
millions. That's what I call a life-changing stock.
When the government began its massive effort to
modernize its computer systems in the mid-1990s, Oracle
(Nasdaq: ORCL) and
Dell (Nasaq: DELL) were the main suppliers. These lucrative contracts
kick-started epic growth at both companies, as they branched
out to consumers and businesses worldwide.
Investors who got on board Oracle back then brought
home gains of +1,185% by the end of the decade. Dell saw
their shares skyrocket +7,861% over the same time, turning
$10,000 into a sweet $796,100.
Force That's Getting Bigger
I'll be honest, government action wasn't even one of my main catalysts
until a couple of years ago. But seeing the money that the government is
pouring into the economy to battle the recession, I've quickly found it
to be one of the most powerful catalysts I've ever seen.
Since the financial crisis began, the federal government has spent, lent
or committed more than $14 trillion to bail the country out. And every time
one of those public dollars is spent, a private-sector profit is
realized. That means hundreds of billions in profits.
You simply have to
identify the areas targeted for the highest government spending... find
the companies in those sectors... single out the few most likely to
profit... and buy their stocks.
Catalyst Five: Shifts in the Global Economy.
Who could have guessed five years
ago that the strongest stock market in the world would be Mongolia -- up
an astounding +1,318% in dollar terms from 2006 through 2010? Or that
Peru would be up +493%, Indonesia up +248%... China up +195%... all while
our own S&P 500 trailed far behind, gaining just 12%? And keep in mind that
a nasty global recession tempered some of those gains in foreign countries.
It's clear that smart
investors are taking their heads out of the sand and positioning
their money to profit from the new global economic order. It's
nothing against the U.S. In fact, even with the recent increase
in government spending and a nasty recession, the United States
is still considered the most stable market in the world.
It's just that after the U.S. has grown into one of the most developed markets in
the world, the strongest growth is now coming from foreign markets. In fact,
three-quarters of the world's
GDP growth is now coming from outside the U.S.
And for good reason: More nations than ever are making the right
moves for economic growth.
During the past couple decades, for example, the transition to a
market-based economy has transformed Chile from an economic
backwater to a role model for all of Latin America. The nation
now has one of the highest GDPs per capita in the region.
Stock Market Returns
*In dollar terms
But Chile isn't only country getting its economic ducks in a row. And
add to many of these reforms the fact that economic growth is also
leading to a rise in the middle class in many nations -- further
It shouldn't be a surprise that one of the strongest catalysts you can
use to power your portfolio is this massive shift in the global economy.
For instance, the iShares MSCI Brazil Index (NYSE: EWZ) saw gains of
+172% from 2006 through 2010 -- powered completely by this catalyst.
I've taken full advantage of this in my
Market Advisor model
portfolios. One portfolio has half its holdings leveraged to
international markets -- including funds tracking Indonesia, a Chinese
advertising company, and the WisdomTree Emerging Markets Small Cap Fund
Now that you know the largest catalysts impacting securities in today's
market, I hope you're excited to start putting them to work in your own
portfolio. But we before you start, I have a few important tips for you
to keep in mind before you begin investing. In the final section of this
course, I'll share with you my five most valuable tips for catalyst
Section Three: My Most Important Tips for Catalyst Investing
You've seen the gains
a catalyst-based investing style can add to your portfolio. But the
tips and advice I'm about to share with you could prove to be the most profitable.
I've been using catalysts to drive my investment decisions since I
started as editor of the
StreetAuthority Market Advisor, and based on the performance of
my portfolios, I think it's safe to say the system works. But don't make
the mistake of thinking you only need to find a stock benefiting from a
catalyst and throw your money at it.
Instead, there are a few pitfalls to watch for -- and a few tricks I've
learned -- that can help you successfully pick the right stocks that
will benefit from catalysts.
Think of these as a gift from me to you to help you become a more
accomplished catalyst investor.
Wherever there is a change, new catalysts are being created and
destroyed. Catalysts are nothing if not always in a state of flux.
Products become outdated... competitors encroach on a company's
territory... economies heat up and cool down...
In short, catalysts are always being created and destroyed. That's why
it's important to invest in the businesses with the strongest catalysts
-- the stronger the forces driving the stock higher, the less likely
they are to be impacted by any changes or threats. For example, Apple's
overpowering iPod catalyst continued pushing the stock for years, despite dozens
of similar devices coming on to the market to compete.
2. A terrible thing
happens when you don't have a strong catalyst -- nothing.
There is a reason most great companies don't make great investments. If
a company isn't benefiting from a catalyst, it's dead money -- no matter
how great its operations, history, or status. That's why I typically
avoid many of the market's largest and most well-known players, unless
there is a strong and clear catalyst.
Just look at the pathetic stock performance of the nation's
"newspaper of record." For years, The New York Times
(NYSE: NYT) generated
strong, stable profits. Circulation was stable, and newspaper
companies were considered cyclical plays whose fortunes rose and
fell with the broader economy. Another day, another edition -- half
ads, half copy. What could change?
The whole world changed, and fast. The digital revolution catalyst
that ignited fires under firms like Google (Nasdaq: GOOG) and Yahoo!
(Nasdaq: YHOO) caught
newspapers off-guard. Their desperate moves to retool themselves
into broader-based communication companies fell short: the TV and
radio stations they bought also saw their ad revenues slip, while
viewership and listening habits changed.
This string of negative catalysts painted an ugly portrait for Times
investors. On August 19, 2004, the day Google went public -- a
critical milestone in the advertising world -- The New York Times
closed at $42.06 per share. The stock has since dropped as low as $4,
falling more than -90%... while Google has soared.
3. Catalysts aren't just for growth stocks. During this
course we've talked a lot about the gains you can see when a small
stock, such as Green Mountain Coffee Roasters, is impacted by a
catalyst, causing revenues, profits, and the share price to soar.
But don't think catalysts are reserved only for tiny growth companies...
Catalysts can and do impact every single asset class in one way or
another, whether it's income securities, value plays, even real estate
trusts and government Treasuries! That's why my model portfolios in my
Market Advisor newsletter aren't simply focused on growth.
I do have a a growth-focused portfolio, but I complement that with one focused
on income and one focused on value stocks. Catalyst impact every
single security on the market -- focusing solely on growth stocks is
4. All stocks have a catalyst to some degree... so it helps to rank them.
Just as every asset class can be impacted by catalysts, catalysts are
also impacting every security -- just to varying degrees.
Think of shares of Target (NYSE: TGT). If consumer spending is
increasing, then the giant retailer might have the wind at its back,
giving nice support of a rise in the shares. But is this really a
Instead, think of a business like Silver-Wheaton (NYSE: SLW),
which has a unique business model that buys future silver production in
advance at discounted prices. With silver returning 83% in 2010, it helped rocket SLW shares +160%. It's plain to see that rocketing silver prices is a much stronger
catalyst to Silver-Wheaton than a slight uptick in consumer spending is
That's why I always rank the catalysts impacting my potential
Market Advisor. This way, I have a simple way of
showing readers just how strong the catalyst impacting the shares is. As
a treat, I've included my ranking system below to give you an idea of
how you can rank the stocks within your own portfolio.
Stars --> These stocks are benefiting from the
strongest catalysts available in today's market. We expect
them to deliver triple-digit percentage gains over the
next year or two.
Stars --> These companies are poised to profit from
positive news events, trends, or other catalysts. We
expect them to handily outperform the broader market over
the next year or two.
Stars --> These stocks are benefiting from one or more
positive catalysts. Although these catalysts aren't strong
enough to lead to dramatic share price outperformance, we
expect these stocks to slightly outperform the broader
Stars --> These stocks have one or more identifiable
catalysts, but these catalysts are relatively weak and are
unlikely to provide a major boost to the shares. We expect
these stocks to underperform the market over the next year
Star --> There are little or no identifiable
reasons for these securities to increase in price in the
coming year or two. Due to a lack of positive catalysts,
these stocks are "dead money" at current levels.
Needless to say, I avoid any stocks rated 1 or 2 stars for inclusion to
5. Using catalysts represents one of the top ways to beat the
market... by a wide margin. I didn't just become a believer in the
catalyst system of investing because I thought it sounded good. I
believe in it because I've seen it work -- not on paper, but in the real
Before I took over the reigns of the
StreetAuthority Market Advisor, my
predecessor and StreetAuthority co-founder, Paul Tracy, had already been
using the catalyst system to determine his investment decisions. In
fact, Paul's the one who turned me onto this method.
And while I trust Paul, it wasn't just his word that convinced me of
catalysts... it was his results. When Paul first began grooming me as
Market Advisor's "Top
Growth Picks" Portfolio -- the
cornerstone of the newsletter -- was simply blowing away the broader
market thanks to its focus on catalyst-driven stocks.
And even through a nasty recession, one of the worst bear markets in
history, and years of competing against the market, the catalyst
system is still walloping the S&P 500. Since the portfolio began
in May 2003, the S&P 500 has returned +38%. But
thanks to catalyst investing, the "Top Growth Picks" Portfolio has done just
that... by a 4-to-1 margin. A total return of +146% simply leaves it
unquestioned that catalyst offer perhaps the best way to find winning
stocks in any market.
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