Six Trading Catalysts and How to Take Advantage

Six trading Catalysts and how to take advantage

In a previous article I have provided an output for “bargain” stocks but I haven't explained why those stocks have been trading so cheap and even lowered in price, though the valuations have been solid for a number of months. In this article I will provide the case for catalysts and in a forthcoming article I will describe a list of qualitative factors investors and traders need to watch out for in order to avoid purchasing poor companies where the weaknesses are masked by temporary and apparently healthy quantitative results.

A trading catalyst is a force that will move the price of a stock in a certain direction, i.e, higher or lower. It is a unique variable which is not associated with balance sheet analysis but rather a time dependant event which has the effect of creating the market sentiment which will convince the average investor or trader that a stock should be bought or sold. Catalysts are largely psychologically driven although they have financial concepts backing them up. In this article I will provide different stock analysis comments and what type of catalysts are important as the drivers of the stock price.

There are many different variables that can be described as catalysts. These mostly depend on the structure of the company as well as what type of security we are dealing with. Newer companies can benefit from company roadshows as well as journal and magazine articles describing their new successes. Patents are a method for already mature companies to attract new business and growth.

Increasing Investor Confidence           
 
Cash rich companies with low price-to-book value can profit from buyout rumors as well as dividend payout.
Six Examples of Trading Catalyst
Expensive companies can drop in value on announcements of additional equity offerings. Growth companies can have their prices pushed higher by buyback announcements as well as legal resolutions. A growth company’s major stock boost is achieved if they are included in a more well-respected exchange or an index; for example including a stock on the NASDAQ or a Japanese stock shifting from the second section of the Tokyo Stock Exchange to the first section. Certain exchanges have strict listing requirements which means that if they are included, investors have greater confidence in the quality of the stock and vice versa.

Taro Pharmaceuticals (TAROF US) was de-listed off the NASDAQ following delinquency of the financial statement reporting which led them to be removed from the NASDAQ. The stock plummeted following its announcements. 

Market tracking indices will have more quantitative or macroeconomic variables as their catalysts, as we saw with the Morgan Stanley Growth Fund for India. Concepts like expected GDP growth and foreign exchange rate adjustments as well as a reversion of NAV premium-to-parity will be common catalysts as well.

 

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