What Is a Catalyst?
A catalyst in equity markets is an event or other news that propels the price of a stock dramatically up or down. For example, a catalyst could be an earnings report, analyst revision, new product announcement, legislative changes, lawsuits, mergers and acquisitions (M&A), or involvement from an activist investor.
Key Takeaways
- A catalyst in the markets can be anything that leads to a drastic change in a stock's current price trend.
- The most common catalysts come in the form of new, often unexpected, information that causes the market to reevaluate a company's business prospects.
- Examples of catalysts include earnings reports, new legislation, and product announcements.
- Some investors and traders look for catalysts to create short-term market opportunities for profit.
- While many value investors focus primarily on company fundamentals, it may take a catalyst to realize the true value.
Understanding Catalysts
In the financial media, a catalyst is anything that precipitates a drastic change in a stock's current price trend. It can be negative news that rattles investors and breaks upward momentum or good news that pushes the stock up.
Investors will assign different levels of importance to catalysts, depending on their market philosophy. Value investors tend to put less emphasis on catalysts and look instead for operational efficiency, goal-oriented management, reasonable valuation,anda 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. In reality, few investors are entirely one type or the other but fall somewhere along the value-momentum spectrum.
Special Considerations
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 that exist off the mainstream market's radar. They will compile a watchlist and develop a sense of what news might spark price movements, as opposed to being failed catalysts.
Catalyst Example
Kohl's (KSS), which has been the target of activist investors over the last couple of years, received a buyout offer from activist hedge fund Starboard Value for $64 per share on Jan. 21, 2022. Shares jumped 37% the next trading day. This comes after Engine Capital and Macellum Advisors had taken stakes in previous months and pushed the company to consider a sale. The stock's price has seen sharp single-day increases throughout the last year on new activist investor announcements and letter releases.
