Catalyst driven investing is a subset of value investing.
It seeks out investment opportunities with imminent catalysts that help to catalyse the realisation of value for undervalued securities.
The universe of such investments stretch far and wide and can become very complex. But there are simpler subsets of this vast strategy that retail investors can capitalize on from the comfort of their own home.
Here are 7 ways to profit from a volatile market using catalyst driven investing:
1. Potential Mergers & Acquisitions
These are companies which are already working on sales processes and have a change of control agreements already in place.
As such, there is a general support to the stock price, even during market sell-offs.
When the mergers are announced or rumours leaked, these stocks tend to pop in value, which is the main catalyst we look for to exit.
2. Merger Arbitrage
These are stocks which the mergers have already been announced, and there is a spread between the final merger price and current market price due to uncertainties from regulators as well as shareholders.
The main catalyst we look for in these situations is the closing of the merger, and will use unusual sell-offs in such stocks to capitalise on the opportunity.
3. Tender Offers
From time to time, companies tender offers for their share price due to buybacks, and very often odd lots tend to be successful in these offers with decent returns being offered.
Such situations are usually low risk ways to profit in which retailers tend to have an advantage over institutional investors due to the account sizes.
Companies often underperform, and from time to time activist shareholders will attempt to restructure companies which are trading below their intrinsic value due to management underperformance.
We usually attempt to take advantage of such situations when a reputable activist investor takes a position in the company and the company has material upside from a potential restructuring.
Bankruptcy situations at times can be profitable after being announced if a good restructuring proposal is executed and accepted.
These tend to be complex but have good asymmetric risk-reward pay offs because the worst for these stocks are already behind them.
Companies from time to time may choose to liquidate as they find it better realises value for shareholders.
This is quite a common occurrence in holding companies and REITs, and the liquidation stocks sometimes trade below the value of the assets being sold due to market volatility.
This is when an investor can capitalise on the opportunity to buy into such stocks, whilst sitting and waiting for liquidations to complete, which will realise value for the shareholders.
6. Macro Events
Governments and central banks sometimes announce large market moving events that can catalyst large moves in currencies or commodities.
This is one of the harder subsets of catalyst driven investing to capitalise on as macro situations are not always easy to read.
However, when done with proper risk management, this often can be very rewarding for the investors.
7. VIX Curve Anomalies
The VIX term structure is normally in contango. This means that the next month’s futures tend to be more expensive than the near month’s contract.
During volatile markets, this curve shape shifts to backwardation, and investors can bet on a mean reversion for volatility which always happens. This can be done through ETFs and futures contracts.
How can you profit from catalyst driven investing?
Simple. Join as a free member!
Our membership is free. We keep all our members updated regularly of catalyst driven investing opportunities around the world. Members get to see which are the opportunities we are putting our own money into. Most of these opportunities covered have catalysts that should catalyse value between a 1 to 24-months period.