Recall that I had written some time back on the important elements which should be present in an investment thesis. In short, this consists of the company’s competitive moat, catalysts and risks. I had covered competitive moats in my moats series, and also discussed extensively on the risks aspects in a previous article.
Here, I would like to concentrate more on the importance of catalysts when investing, and how they can bolster the case for an investment idea and make it more attractive.
What Constitutes A Catalyst?
A catalyst is an event or corporate action which would grow the business or cause it to evolve, such that the organisation benefits from it and becomes better as a result. The word has a broad range of definitions, and some examples may include – the construction of a new factory or plant to increase production, the introduction of a new product line or a line extension, a merger or acquisition, the winning of a major contract or the signing and sealing of a joint venture agreement.
Any corporate event or announcement which has the opportunity to alter the business for the better can be considered a catalyst. Of course, there are also examples of negative events, but for this article, all catalysts will refer to positive news and events.
The Importance Of Catalysts
I believe catalysts are important for ensuring that a company we invest in is doing something tangible and measurable to grow the business. For myself, I would prefer to invest in a company with well-defined catalysts which have been communicated by management, compared to one which is cheap and cash-rich but lacks meaningful catalysts. Catalysts are clear signals given by the company that it is targeting growth, and most companies would also spell out the steps and strategies taken to achieve this planned growth.
Assessing And Monitoring Catalysts
Once the investor has identified the catalysts as part of his investment thesis, the next important step would be to monitor and assess these catalysts to ensure that they are both executed well and are performing to expectations. For example, if management had committed to an acquisition to bolster revenue and earnings, check to see if this is so or whether the acquisition turned out to be a lemon.
Also, investors should be wary of management making promises which they subsequently faile to keep – such catalysts may simply vanish into thin air overnight if management scraps an important project or did not manage to clinch a pivotal contract.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.