Catalysts?

HFunder:

As you've already mentioned, catalysts are the core of an event-driven/special-situations strategy, as the basis for making an investment is heavily predicated on an "event" that will (expectedly) make an equity appreciate in value.

For the purpose of answering your questions, I will use biopharma/pharmaceuticals as an example.

From a Macro perspective, catalysts in question could be an expected increase in the incidence of a certain kind of Cancer (perhaps scientists conduct research and find that XYZ cancer is expected to spread in SE Asia due to a genetic anomaly). If you're a company that is attempting to cure XYZ cancer in a disruptive way, this would be a positive catalyst for you.

From an industry specific perspective, a catalyst could be the fact that the Standard of Care for treating XYZ cancer is going off patent/generic in a year, which would mean that the markets will be flooded with multiple renditions of the same drug (this could potentially necessitate the need for a new and differentiated therapy).

From a company specific standpoint, catalysts will traditionally be potential licenses, commercial partnerships, a potential buy-out by a big pharma company, statistical significance in clinical trials/strong data readouts, good safety profiles/low incidences of adverse events, etc.

Unique catalysts could include a pharmaceutical company in-licensing/acquiring a novel technology/therapeutic that could redefine the company's business model (executing a reverse merger to accomplish this end), a CEO change, reduction/apt management of expenses (I personally don't view this as a "hard" catalyst), or a large fundamental investor taking a significant stake in the company (active or passive) to name a few.

Hope this helps.

Awesome - thank you for the detailed breakdown! From what I can gather, the catalysts vary from industry to industry?

Secyh62:

As an active investor, you depend on market efficiency. If you are able to identify a true mispricing, the only way you can realize alpha is for that mispricing to eventually be corrected and for the security to become efficiently priced. So your first task is to identify why the security is mispriced? What is the market missing (or is my value estimate even correct)? If you can identify the source of the mispricing, the only way you can realize the difference between your estimate of value and the security's current market price is for the market to also become aware of the mispricing, and to act on it until price converges to your estimate of intrinsic value. An event that causes the gap between market price and intrinsic value to close is a catalyst. In the most general sense, a catalyst is information that the market does not have, or has not appropriately discounted, that works to move the consensus in your favor once the market receives, or better processes, said information. Value investing is not simply buying cheap securities, it is buying securities that are undervalued relative to their intrinsic worth (generally based on cash flows). There is always a reason that something is mispriced. Just because you think a stock is undervalued does not mean that the market will magically gravitate to your estimate. The catalyst is the kick in the ass the market needs to correct a mispricing.

Excellent post.

Well in many cases Elliot IS the catalyst. In others, yes, it's very easy to spot catalysts in an event-driven strategy. I think if your time horizon is 2+ years, then the need for a hard catalyst isn't quite as important, as the market will re-rate in the LT.

Haha for those guys it's likely down now.

Though ackman has started to turn things around now as he's gone back to strategies he made money on before.