What is a catalyst?
I just got into my school's investment fund, and I am trying to figure out what a catalyst actually is. I understand it is an investment driver that is supposed to be specific to the company and not priced-in. However, I am trying to understand what a catalyst looks like. For Google, for example, I would have thought that a catalyst would have sounded like "Google has the capital ready to deploy towards space traveling and they are eyeing it given the brief mention in their last conference call, I believe they will do it." However, as I read more and more ER reports, I realize that many of the catalysts are structured as "I believe gross margins for xyz division will be x instead of y." The former seems more outlandish, whereas the latter seems more doable but not as impactful of an investment driver. What is more commonly used on Wall Street ER reports?
The catalyst is basically the event(s) that will affect the stock price of a company in the investor's eyes based on all the existing information out there.
To better understand it, go through the Value Investors Club forum, click on each investment thesis (name of the company analyzed) and if you scroll to the end you'll see that almost all end up with 'Catalyst'. After 5-6 readings you should get the point.
Important to understand that the term is often overabused. That's why some refer to "soft catalyst" (continued earnings growth that might even be in line with current estimates) vs "hard catalyst" (activist gets involved, or company announces sale of major division, etc).
How do you make money if earnings keep growing but everyone also expects earnings to keep growing? Thought u always needed a variant perception to make money since there's no reason for the stock to move if everything else is already baked into the price?
My whole point is soft catalysts tend to be bullshit.
Real catalysts that no one else expects are very hard to find, but many PMs always demand their teams produce ideas with catalysts. Thus why people come up with "soft catalysts" that are really BS.
Well the truth is you can still make money if earnings keep growing but everyone expected earnings to keep growing - in fact a lot of LO and mutual fund investors are investing in situations like this, and even still many HFs. With these situations, it is more about finding the right price to pay and playing the timing right (so much for not timing the market ever right?).
HFs would prefer a variant perception though (and we discuss it a lot because they are looking for your ability to argue that thesis in interviews) - some of that comes from the style of looking for idiosyncratic bets as that should increase the proportion of returns that are coming from alpha, and some of it comes from a general investment philosophy about what types of scenarios provide the best risk/reward. The problem is usually the risk/reward in that first scenario can be not great (a great company performing strongly and missing just shy of heightened expectations can provide poor returns).
There are very few people out there with a truly variant perception about Google or Danaher, but you will find them in lots of portfolios and those businesses can still generate strong returns and outperform the market. Buying a compounder at the right price and time can yield great returns for some investors.
there’s always earnings
-pod bro
I would rephrase "what's the catalyst for this stock" as "what's the event that will make it easy for the market to re-rate the stock."
You have a thesis. Presumably, the thesis is involves something that the broader market can't easily see. Once a catalyst happens, the market has to get on board with your thesis because now the value is abundantly clear.
That could be a qualitative strength turning quantitative, i.e. a company has been doing XYZ good thing but that hasn't showed up in a headline number like earnings or revenue, and once it hits those headline numbers the market can easily see it.
Or it could be an event like a deal. Or it could be an inflection point, i.e. the company has had mid-single digit growth for a while but is about to jump to double digit.
It could be a lot of things. But I think what they all have in common, is that the market can't see things as clearly as a guy who knows the company backward and forward; so the catalyst is an event that allows even a casual analyst to see the value easily.
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