Identifying the Catalyst

Have you invested in a stock, hoping it would go up, only to watch it stagnate for months or years at a time? You may have investigated the company's fundamentals, determined it was trading at a discount, and threw money at it expecting other investors to jump on. You did everything right but forgot to step on home plate. You forgot the Catalyst.

The Catalyst
A catalyst is the initial snowball that heightens other investors' awareness about a particular stock. It can be a press release, official announcement, news coverage, a famous investor buying the stock, increasing or new investment analyst coverage, growing trading volumes, a positive earnings release, a political event, or even an environmental crisis. Assuming the stock fundamentals are solid (and sometimes even if they are not) the catalyst will cause investors to flock. The key is identifying a quality stock before or during the catalyst. Finding a quality stock will be covered in other research articles, however, once a stock is found, the next step is tracking the catalyst. The catalyst will cause a price surge or crash and will thus bring the stocks price closer to your target. Once within threshold or at target, it is time to sell. To maximize you returns, you want to minimize the window between initial stock purchase and final sell.

What we do
At FMI, we scour the internet for cataclysmic mentions in the market. Simultaneously, with our AI stock ranker, we asses the company's fundamentals relative to the market, consider analyst opinions, and then fire away the buy order. Often times the stock takes off. Other times, the identified catalyst isn't strong enough. At the point, the best move is to sell for no gain and try again. If 3-6 months have passed, the stock price hasn't budged, and a new catalyst has not occurred, it is time to consider the next investment opportunity. Stocks that are continually covered by analysts have a better chance of being cataclysmic. If investment bankers are issuing negative catalysts while you are long, it is time to get out. Remember, the institutions are working with very large sums of money. On one hand, they are forced to move slowly because it is hard to liquidate large amounts of funds and also must invest confidently as their performance is their livelihoods.

The Research
One research paper by found that hedge funds cause 0.5% stock price swings at the end of a fiscal quarter. Hedge funds are able to move faster than mutual funds, endowments, pension funds, but all of these funds making a decision in unison over a week or month time period can significantly alter a stock price. Us smaller investors can take advantage of this by identifying quality stocks early and getting in near the catalyst. We can ride the curve as the banks and slower moving funds reallocate their dollars towards the relatively cheap stocks. The key is identifying quality stocks, which will be covered in other articles, but once the stock is identified, it is critical to monitor cataclysmic events to determine a suitable exit point to maximize returns or mitigate wasting time.

Check out our other articles to learn more about stock ranking.

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