What is an Asteroid Event?

An asteroid event is a sudden, unexpected incident that has serious consequences for a business.

Key Takeaways

  • Asteroid events are types of event risk that find companies unprepared.
  • Institutional investors may try to benefit from an asteroid event if they perceive it as a temporary stock mispricing.

Understanding an Asteroid Event

Asteroid events are types of event risk that find companies unprepared. For example, if a public company relies on a particular executive or board member, or the sales of one or a few products, then a sudden departure or market disruption could reduce sales and the stock price.

Institutional investors may try to benefit from an asteroid event if they perceive it as a temporary stock mispricing. Such a strategy leverages the tendency of a stock price to decrease due to a sudden or dramatic change. Stock analysts review factors such as the regulatory environment and possible synergies or advantages of the changes, then set a new price target for the stock. An investment decision would then be made based on the current stock price and the price objective. A correct call could lead to profitable trading; an incorrect call could generate losses.

For example, when an asteroid event such as a hostile takeover occurs, the stock price of the company is likely to fall. Research analysts aim to project whether the takeover will occur, and its effects and their duration as well as implications for earnings and the stock price. If the takeover fails, the stock price could rise or fall depending on market sentiment. Analysts could estimate a stock price range or select a single price target for each. Investors would buy or sell shares of the target company depending on their outlook on the transaction and the stock price

Risk factors in the 10-k Report

Companies are required to publish fundamental information so investors are better able to make informed investment decisions, in documents such as the annual 10-k report. Five sections are included: business overview, risk factors, selected financial data, management discussion and analysis of financial condition and results of operations (MD&A) plus financial statements and supplementary data. The risk factors section lists current and potential risks the company faces, listed in order of importance and may provide clues to areas vulnerable to event risk or asteroid risk. However, it focuses on the risks themselves, not how the company addresses them.

Some risks may apply to the entire economy, some only to the company’s industry sector or geographic region, and some may be unique to the company. Companies may discuss how they handle competition, build their brands, or manage in an economic downturn. Or, they may address how they ensure compliance with laws and regulations, or how they are addressing the impact of new or expected laws and regulations.

Example of Asteroid Event

As an example, asteroid events may occur in small pharmaceutical or biotechnology companies dependent on clinical trial success, FDA approval, and product sales of a single drug. If company ABC has only one drug in the pipeline for FDA approval and the approval gets denied, it can leave the company in shambles.

Other potential asteroid events are restructurings, mergers and acquisitions, bankruptcy, spin-offs or takeovers.