A Deeper Look Into Catalysts and How They Affect Investors

Catalysts can sometimes form the backbone of a robust and well-thought-through investment thesis. Investors may be wondering, though, what types of catalysts are there, and how will they affect my investments? Do these catalysts have a short-term impact, or can they persist for years, or even decades?

Award of a contract

For a contract-based company, one of the more common catalysts is the announcement of winning a contract, which boosts the company’s order book and enhances the prospects for revenue and profit growth. Though this catalyst may sound impressive, investors should note that contract-based companies need to be awarded contracts consistently in order to have a steady flow of business. Unless the contract is transformative by being either very large (with respect to the normal flow of contracts the company clinches) or very reputable (big-name client), investors probably shouldn’t get overly excited.

Change in business direction and strategy

A good and strong catalyst to watch out for is if a company decides to embark on a change in business strategy in order to grow at a quicker pace. Note that this can be either positive or negative, and it depends on factors such as management competence, attitude to change, the industry the company is in, and also the competitive forces within the industry.

A positive catalyst would involve the company exploring a new innovation shift in its business – perhaps a technological advance – in order to propel it far above what competitors are able to achieve. If successful, this would be a sustainable and enduring structural change that would benefit the company for years, or even decades to come.

Building a new factory or plant

A company’s decision to build a new factory or plant normally signals that organic growth has been very good, which prompts management to announce an expansion in capacity and/or production. Investors should definitely cheer such decisions as higher supply – if met by higher demand – would translate into higher profits and more business for the company.

However, there are a few aspects to note about such catalysts. Investors should assess if the company’s industry is cyclical; if so, then demand may one day plummet when the business cycle turns. Investors should also observe if the company’s competitors are also ramping up capacity at the same time, as this may signal the potential for over-supply in the near future.

Acquiring new businesses

Yet another catalyst may come in the form of a merger and acquisition (M&A). In a previous article, I have given readers the tools to decide (on a case-by-case basis) whether an acquisition is good or bad for a company they are researching.

The Foolish bottom line

The above are just a few examples of common catalysts companies can announce. It’s important for investors to assess the duration of the effect of the catalyst, and whether it has a long-lasting effect on the prospects of the company.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.