Catalyst

What is a 'Catalyst'

A catalyst in equity markets is a revelation or event that propels the price of a security dramatically up or down. A catalyst can be almost anything: an earnings report, an analyst revision, a new product announcement, a piece of legislation, a lawsuit, an outbreak of war or unrest, an offer to buy a company or merge, a move by an activist investor, a comment from a CEO or government official, or the conspicuous absence of a company officer at a special event. In general, it is a news item that has no immediate effect on the fundamentals of a stock, but rattles investors, breaking the price's upward or downward momentum – or sideways lack-of-momentum – and unlocking value (in the case of a rise in price) or bursting a bubble (in the case of a fall).

BREAKING DOWN 'Catalyst'

Depending on their approach, investors will assign different levels of importance to catalysts. Pure value investors ignore catalysts entirely and look instead for operational efficiency, goal-oriented management, reasonable valuation and strong market position. For these investors, catalysts are pleasant surprises – assuming they were correct in their assessment of a company – either providing an opportunity to build up a position cheaply (in the case of falling prices), or realizing the value they'd seen all along (in the case of rising prices). Pure momentum investors, meanwhile, will watch carefully for catalysts, or their effects on prices, trying to be the first to recognize them for what they are and to buy into a bullish turns, or bow out of bearish ones.

In reality, few investors are entirely one or the other, but fall somewhere along the value-momentum spectrum. An investor might concentrate primarily on a company's fundamentals, but acknowledge that a catalyst will be necessary to realize that value. They might devote significant thought to what that catalyst might be, keeping their ear to the ground when it comes to new products and the state of markets where the company operates. At the same time, the bulk of momentum investors will have some sense of what companies might be undervalued or off the mainstream market's radar. They will compile a watch list and a develop a sense of what news might spark price movements, as opposed to being failed catalysts. Few investors focus exclusively on financial statements, at the one end, or retracement levels and trendlines​, at the other. 

Example of a Catalyst: Nike

Since a catalyst can take any number of forms, it's better to give a concrete example. On August 25, 2015, the S&P 500 Index hit a low for the calendar year of 1867.61, 12.51% below its all-time intraday high of 2134.72, which it had hit on May 20 of that year. The decline, which had begun the previous week and hit its stride on August 24, was the steepest since 2011, and dragged a number of quality stocks down out of sheer panic. Nike Inc. (NKE) was one of these: having closed at $114.98 on August 17, it touched $94.50 on August 24.

Yet the business was as solid as ever, and had very nearly recovered by market close on September 24, reaching $114.79. Later that day, the company reported quarterly earnings that exceeded expectations by 12.61%, and the stock shot up to an intraday high of $125.00 the next day. In other words, the catalyst of an earnings surprise propelled Nike's share price upwards by 9.71% in less than 24 hours (and 33.27% in a little over a month), despite lousy prevailing market conditions.

The change was due to new information and a resulting change in investors' perception, not the fact that Nike was 109.71% as valuable on Friday as it had been on Thursday, or 133.27% as valuable as it had been a month ago. Catalysts arise because of market inefficiencies: herd mentality, information asymmetry, blind spots and out-of-whack valuations.

 

RELATED TERMS
  1. Event Study

    An empirical study performed on a security that has experienced ...
  2. Profit Taking

    The act of selling a security in order to lock in gains after ...
  3. Momentum

    The rate of acceleration of a security's price or volume. The ...
  4. Flat On A Failure

    Closing out a position and taking profits when the security in ...
  5. Shakeup

    A series of events and processes that a company's management ...
  6. Earnings Momentum

    When corporate earnings per share (EPS) growth is accelerating ...
Related Articles
  1. Stock Analysis

    Nike Still Winning

    Nike continues to exploit a dominant brand and new markets.
  2. Stock Analysis

    Nike's Still Got Swoosh

    The market didn't like Nike's future orders or inventory build up, so shares went down. What should investors make of this?
  3. Investing

    This 6.5% Yielder Is Poised To Soar... Thanks To Its 'Stealth Catalyst'

    <p>As you many of my long-time readers know, my boots-on-the-ground approach to finding the world's best investments has taken me all over t...
  4. Investing

    For Nike, there is no China Slowdown (NKE)

    The athletic company has done tremendously well in China despite a slowing economy. Find out how Nike has been so successful in this elusive segment.
  5. Stock Analysis

    How Nike (NKE) Continues to 'Do It'

    Other than style, do sneakers from any maker really differ that much? That's debatable. But this is certain: Nike sets the standard for selling an image.
  6. Stock Analysis

    Do Nike's Earnings Have Broader Meaning On China?

    Nike's disappointing futures have investors worrying more than ever about China. Long term, Nike could be healthy, but don't expect a quick recovery.
  7. Stock Analysis

    How Nike's Stock (NKE) Continues to 'Just Do It'

    Nike always finds a way to fuel growth. Here is a look at its latest strategy.
  8. Stock Analysis

    China Still A Pebble In Nike's Shoe

    China remains a stumbling block for Nike.
  9. Stock Analysis

    If You Had Invested Right After Nike's IPO

    Learn what $1,000 invested in Nike's initial public offering (IPO) would be worth today and how the company became a leader in athletic apparel.
  10. Investing News

    Nike Looks Good Going Into Its Quarterly Earnings Call

    Will Nike continue to just do it this earnings quarter as well?
RELATED FAQS
  1. How can I calculate a company's forward p/e in Excel?

    Discover why trading volume is higher when the price of a security changes. Supply and demand is the mechanism through which ... Read Answer >>
  2. How can I evaluate if a stock is a short squeeze?

    Determine whether a stock is a short squeeze by studying the catalyst that caused the rally. Traders need to determine whether ... Read Answer >>
  3. What can cause an asset to trade above its market value?

    Learn some of the factors that can affect the price of an investment asset and the major reasons why an asset might trade ... Read Answer >>
  4. How do investors lose money when the stock market crashes?

    Over the last hundred years, there have been several large stock market crashes that have plagued the American financial ... Read Answer >>
  5. What are the safest investments during a bear market?

    Learn what investments carry the least amount of risk during a bear market and how they can be used to hedge against falling ... Read Answer >>
  6. When does a growth stock turn into a value opportunity?

    Learn how fundamental analysts use valuation measures, such as the price-to-earnings ratio, to identify when a growth stock ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center