Sunday, 15 January 2017

Look at FUNDAMENTALS and POTENTIAL CATALYSTS when making investment decisions

Look at Fundamentals

Value investors who paid attention to fundamentals (e.g. strong businesses masked by unprofitable divisions, or companies trading at discounts to cash etc.) reaped enormous profits.

Look for potential catalysts

Investors should look for potential catalysts when making investment decisions.   Catalysts are events that cause a stock's value to be recognised, thus resulting in immediate returns to investors who purchased at a discount. 
  • A liquidation is an example of a catalyst, and there are some companies where such events have returned generous - and quick - positive results for investors (e.g. during bankruptcy events, where securities generally trade at a discount to their recoverable values).
  • Share buybacks and asset sales also represent partial catalysts, as they can cause a stock to inch closer to its underlying value.  More importantly, such events signal that management is interested in returning value to shareholders, which bodes well for the future.
Some areas where value investors can indeed find value include: 
  • liquidations, 
  • complex securities (i.e. securities institutions can't purchase because they don't fit set categories), 
  • rights offerings (often offering prices lower than current market value), 
  • spinoffs (as they are usually sold by holders of the parents, thus depressing prices immediately) and 
  • risk arbitrage (depending on the market's mood, as sometimes the market's exuberance can erode returns).

Read also:

No comments: