Finding catalysts statements
This is where the money is made. The rate of change is everything. when it comes to investing you want to look for low returning assets that will convert into high returning assets. that's where the multiples are made.
But this always comes with risk. because low returning assets are very hairy. you don't know what you don't know. and if you need to find out what you don't know, you need to do the work. These are literally diamonds in the rough.
MERGER AND ACQUISITIONS (MY FAVORITE)
How can I value a M&A catalyst?
Valuing a Mergers and Acquisitions (M&A) catalyst can be a complex and subjective process, but there are some general steps that you can follow:
Determine the potential target market: The first step is to identify the target market and determine the potential target companies that would be interested in acquiring the business.
Calculate the expected synergies: Synergies are cost savings and revenue enhancements that result from a merger or acquisition. Analyze the potential benefits, such as cost savings and revenue enhancements, that could result from the M&A transaction.
Determine the expected price range: Use comparable M&A transactions to estimate the expected price range for the target company. This can be based on valuation multiples such as price-to-earnings (P/E), price-to-sales (P/S), and enterprise value-to-earnings before interest, taxes, depreciation, and amortization (EV/EBITDA).
Consider the impact of financing: Analyze the impact of financing and the expected impact of financing costs on the value of the M&A catalyst.
Assess the risk and uncertainty: Assess the risks and uncertainties associated with the M&A process, such as regulatory risks, cultural fit, and integration risks.
It is important to note that M&A catalysts are dependent on a variety of factors and there can be significant uncertainty and subjectivity in the valuation process. As a result, it is advisable to seek the advice of an experienced financial professional or investment advisor.
LEGAL OUTCOMES
Now with every deal there will be hurdles. These obstacles are created by external factors like the government, politics, competitors and much more. the reality is you can't control all of these factors but it is worth pricing the risk. again this is the moment where you have to trade risk.
There's no way to hedge 100% of the risk. I was once told that the best way to do that is to sell what you buy. but that doesn't make sense if you want to make a long-term investment. so in this case we need to accept a certain degree of risk.
What are break-up fees?
One major risk with every investment deal are the break of fees involved with acquisitions. break up fees exist to incentivize the legitimacy of the deal. but the reality is a lot of things can go wrong between the announcement and closing date.
Major concerns come from due diligence. this is no different from when you are buying a stock yourself. but the challenge is the due diligence requires much greater detail. If the revenue line items are expenses don't tally up then the acquire has enough reasons to exit a deal.
MARKET EVENTS, COMPETITOR NEWS OR SOMETHING THAT WILL
Now there are quite a few market variables you need to consider. Ever hear of the "Buy the Rumor, Sell the News" Trading Strategy? Well it’s real. I don’t recommend trading around the news but it is a force you can use to your advantage.
So what do you need to know? Well it helps to know the landscape. What are the competitors doing? How is their relative performance? Are they under scrutiny for a bad deal or poor customer reviews? Any external factor - good or bad - will impact your outcome. Even if it’s by the slightest edge.
WHAT ARE DIFFERENT CATALYSTS I SHOULD LOOK FOR WHEN INVESTING?
Catalysts are events or developments that can drive the stock price of a company higher. Some of the most common catalysts to look for when investing include:
Product launches and releases
Expansion into new markets or geographies
Mergers and acquisitions (M&A)
Partnering or licensing agreements with other companies
Positive clinical trial results or FDA approvals
Increase in revenue and earnings
Improved profitability and margin growth
Positive analyst upgrades or ratings changes
Increase in dividend payments or stock buybacks
Cost cutting measures or operational improvements
Strong cash flows and balance sheet position
Positive regulatory developments
Changes in management or leadership
Technological advancements and innovations.
It's important to keep in mind that these are just a few examples, and each company and industry may have its own unique set of catalysts.
One of the more Uncommon strategies are activist investors. You know the popular ones like Carl Icahn and Bill Ackman. These guys look for underperforming businesses that need a jolt from the market. They are mostly long-term investors that want to compound their capital. gone are the days of corporate raiders and green mailing.
What they do is buy a 5 to 10% position in a business and speak with management. Their goal is to extract something from the capital base. Maybe take a board seat. Most of the time it's some form of financial engineering. Many companies will have a poison pill to protect them against takeover targets or vulture investors.
Some of these investors have a great reputation so when they build a position, the stock usually moves up a couple points. This can be a catalyst in itself. Starboard Value and even Ryan Cohen of GameStop are a few examples of this catalyst trade.
Another option is to follow employee and customer reviews. Today you can find all types of positive and negative reviews in business. But sometimes investors ignore these reviews which are available to everyone. What happens if a product release went poorly? Or 500 employees were laid off via LinkedIn notifications.
My favorite catalyst to look for in every investment is the rate of change. You need to find the mispricing of an idea.