The sooner you reach one target, the sooner you can get started on the next.
I know, slow and steady wins the race. But that doesn't mean settling for stocks that drift aimlessly with no visible means of propulsion. They call it "dead money" for a reason. Which begs the question: How do you identify stocks that are poised to reach their destination sooner rather than later?
I can answer that in one word.
Catalysts.
The Roots of Every Big Winner
Catalysts are embedded in our DNA here at Investing Daily. Allow me to dust off a passage from the May 2010 archives:
In the scientific realm, catalysts are agents that speed up reactions between substances. We've borrowed the term for the investing world and used it to describe a similar phenomenon. A catalyst can be anything that triggers a significant acceleration in stock performance.
For the record, that little excerpt served as the introduction to a position in American Tower (NYSE: AMT). At the time, the explosion in mobile data traffic was putting increasing strains on network infrastructure, and I felt the upcoming rollout of 4G networks would usher in a wave of telecom spending that could quickly send AMT racing from $40 to a target price of $50.
It hit that mark just five months later. Update: With 5G spending billowing its sails, the stock has since cruised to $200.
Catalysts can take many forms. They range from company-specific improvements to general industry tailwinds to big-picture geopolitical developments.
One of the most obvious examples would be new product development. Remember the release of a must-have storage gadget called the iPod all those years ago. Apple (NSDQ: AAPL) went on to ship tens of millions of units in short order, radically transforming the music industry and fueling a 2,000% surge in AAPL stock.
Rapid expansion into untapped markets can also yield extraordinary gains. Just ask legendary Fidelity money manager Peter Lynch. Like most of us, his morning routine involved a cup of coffee on the way to the office. His favorite stop back in the mid-1980s was an up-and-coming regional chain called Dunkin Donuts.
After some digging — which revealed that thousands of new franchises were popping up nationwide — he took a position in the breakfast chain, just before it posted 40 consecutive quarters of positive earnings growth. The rest is history.
Actually, that little anecdote was the inspiration for my recommendation of Dutch Bros (NSDQ: BROS) last June. From a single espresso machine in rural Oregon in 1992, the fledgling coffee enterprise hit 100 locations by 2008. The store count has since doubled to 200, doubled again to 400, and then doubled again to 800.
Management is shooting for as many as 4,000 locations in time. Keep in mind, these are compact drive-thru stands with no interior dining. That model cuts down on labor costs, as well as upfront real estate and construction capital to open a new unit. Like Dunkin, many are run by franchisees that send a steady stream of royalty/licensing income back to the parent.
In just 8 months, BROS has already jumped from below $28 to $85, tripling my stake.
Favorable regulatory changes and/or government policies can also be a powerful catalyst. From import tariffs to infrastructure spending, congressional (and executive) decrees ripple through both Main Street and Wall Street. When Washington speaks, investors should listen.
Case in point, after the Securities and Exchange Commission (SEC) first authorized bitcoin ETFs in January 2024, Coinbase (NSDQ: COIN) rallied from $150 to $250 in a matter of weeks.
Business restructurings can also unlock shareholder value. Mergers, spinoffs, or just cutting loose an underperforming business line. That's why you see hedge funds and other activist shareholder groups nudging corporate boards toward such initiatives.
That's exactly what led me to Unilever (NYSE: UL) last April. The company had just unveiled plans to sell or spin off its ice cream division (including Ben & Jerry's), assets worth up to $18 billion. Once the benefits of such a deal crystallized, I cashed out a 30% profit in just three months.
Of course, not every catalyst falls into a neat little box. There are countless "wild cards" that can spur a stock to record highs. Some are simple one-off events, such as a beneficial legal ruling. Or an airline successfully negotiating with its pilot union to avoid a strike. Or falling fueling prices for a trucking company.
However, the more meaningful catalysts tend to have a lasting financial impact. Take the pandemic. While a nightmare for many, it was a multi-year boon that pushed billions in revenues toward vaccine maker Pfizer (NYSE: PFE) and boredom cure Netflix (NSDQ: NFLX).
Broad macroeconomic factors often fall into this category. Think falling mortgage rates for homebuilders or stronger foreign currency translation for a multinational retailer. Needless to say, wars can also bring cash windfalls. With ongoing conflicts in Ukraine and the Middle East, military drone maker AeroVironment (NSDQ: AVAV) has been posting triple-digit earnings growth and record order backlog.
I could go on, but hopefully you get the point. If you want to stay ahead of the pack, catalysts can help you find your stride.
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