Investment Catalysts

Retail investors like us want to invest in stocks for one common reason: to generate future profit. If you are more interested in specific companies, there must be something about that corporation that is attractive. Whether it is their products or services, their CEO’s track record, or their lack of competition, you must have an investment thesis for your position. This is critical to every investment you make because it is personal and separates your position from the millions of other investors who just read Yahoo! Finance highlights. But when is the best time to prove your mettle in the investment world? Allow me to explain.

Something that is absolutely crucial to your investment is the work of investment CATALYSTS, and I’m not referring to the increased rate of a chemical reaction. When investing in companies, there are certain dates and events that spur a dip or rise in the stock price. The releases of these important business dates are usually available to the public. The most common catalyst events are Quarterly and Annual Earnings Reports releases, and new products and services releases. Companies report financial developments via conference calls and publicly on their Investor Relations pages. For example, I had an interview for an investment club on campus and needed to pitch a stock, so I used the SEC Filings of Ford Motor Co. to assert my long position for the car manufacturer. Here is Ford’s Investor Relations page where you can find their quarterly and annual financial results: http://corporate.ford.com/our-company/investors.

Earnings reports include the two financial statements that all publicly traded companies’ file with the SEC in their 10-Q (quarterly) or 10-K (annual): The Balance Sheet and The Income Statement. In these statements, the performance of the entire company is essentially displayed. Experienced investors can tell which metrics to check for finalizing a fair value of the stock. The 10-K and 10-Q offer much more than just these two accounting statements—equity distribution, earnings per share data, and sector-comparable analysis, etc… are also detailed. Companies have 35 days to release their financials around the end of March, June, and September respectively. The 10-K is released at the end of the fourth quarter in early January of the succeeding year. Remember this for your own investing timeline!

Now remember, this is PUBLIC information, so the millions of people who have access to the same information will likely respond the same that way you do, meaning they will make the same pump or dump (buy or sell) moves in their portfolios. For example, let’s stick with the Apple example and say that they miss their expected profit target by several million dollars. This is a telltale to investors that their operations have been sluggish and were not as good as expected. Expectations are factored into stock prices as earnings report dates approach because speculation exists in the market. The expected profit margin was the reason why Apple’s stock price was $400 instead of $390, hypothetically speaking. After the disappointing statement release, the $390 price reflects the market’s true value of the company.

Also at play here is the existence of options trading. Investors add many types of complex option strategies to their equity positions to hedge against downside risks and multiply the upside potential. Many individuals also short the stock prior to the release date because they expect poor performance and a price drop. What can also happen in anticipation of high growth, a big earnings report, or a game-changing product release is an extremely high demand for the stock—so much that there are not enough remaining common shares to hand out. In this case the short-sellers of the stock are forced to buy back their short sold stock, thus creating an unrealistic inflated price from all the buying. The more dramatic the rise in demand, the greater the magnitude of the increase because the short sellers’ must buy back at the current higher price. This phenomenon is called a short squeeze. This is mainly seen in smaller-cap companies because large cap companies have too many total shares available in the market, also known as float. So, keep all of these factors in mind before you make your next investment.

For new products and services, the CEO or other executives tend to present to the public via media events. One event that is particularly notorious to our generation is Apple’s unveiling events. I bring this up in anticipation for their September 10th Event. The most famous photographs of the late Steve Jobs and current CEO of Apple, Tim Cook, are at these unveiling meetings in front of a big black wall. Before these catalysts, equity analysts and investors bet on the future upswing or downswing of the price after the information is released. The calendar trends are similar to earnings reports aside from the fact that there is no deadline. It is all up to the quickness of the development and polishing of the company’s products and/or services.

Going back to my Ford stock pitch, I also included some catalysts that I expected to occur in the next couple of months. It is necessary to look at both financials and product releases before establishing your position. Ford was introducing a new technology tool that would allow your vehicle’s data to be shared to whichever devices were synced. At the time, Ford had just experienced higher China sales than GM, as well as paying down lots of its post-Financial Crisis debt in just four years. This example goes to show that blending the two most important types of dates in the investment world is a sound way to approach calendar-oriented investing.

Of course there are HUGE catalysts for the broader global markets and indexes, but we will delve into that in a later discussion on macroeconomics and international finance and their effect on your portfolio.

If you are unsure where to find the due dates of company’s financials, refer to Yahoo! Finance. Here is the link, which offers various calendars as well, such as US Earnings, Conference Calls, IPO dates, stock split dates, and more. Feel free to contact me if you have questions.

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