For example, InterDigital (Nasdaq: IDCC) shareholders saw a four-digit return within two months of their catalyst being discovered.  In 1999, cell phone stocks were all the rage, and Qualcomm (Nasdaq: QCOM) was the darling of them all. Qualcomm was the recognized leader in CDMA (Code Division Multiple Access) -- a bandwidth sharing technology that was about to be adopted as an industry standard. Virtually every telecommunications company around the globe was slated to migrate to CDMA. InterDigital, on the other hand, was a small patent holder in the wireless arena, largely ignored by investors. For the better part of 1999, InterDigital's stock stayed in a narrow $4.50-5.50 range. That changed November 17, 1999.

Understanding the importance of the catalyst concept and how it can lead to outsized returns for your portfolio, we at Market Advisor created our proprietary StreetAuthority Catalyst Rating system. This rating system is key to all of our investment decisions and can only be found in our Market Advisor newsletter. In fact, the catalyst ranking is critical for every security we cover, and our editors use the catalyst criteria as they search through thousands of potential ideas in search of the stocks with the greatest return potential.

Today's report will uncover the ins and outs of our StreetAuthority Catalyst Rating system, and show you exactly how catalysts led to gains of more than +2000%... helped our portfolios nearly triple the S&P... and reveal our latest finds using our proprietary rating system.

(1.) What Makes a Catalyst?

Before we dive into precisely how catalysts can help earn eye-popping returns for your portfolio, it's best to get a feel for exactly what constitutes a catalyst for a stock. While they come in all shapes and sizes, catalysts usually fit into one of the following broad categories:

   A major news event such as a takeover announcement, a favorable regulatory ruling or a big contract win. 

Take Wrigley (NYSE: WWY) for example. We added shares of the chewing gum giant to our portfolio in mid-2006, just as they were hitting a bottom. In particular, we liked the firm's solid growth due to overseas expansion, its well-known brand name and its stable, recession-proof products. These factors alone accounted for solid gains in the stock, as the shares rose more than +50% by mid-2008. But then, a major new catalyst was introduced...

Citing Wrigley's "best-in-class global brands," candy conglomerate Mars made a takeover offer with the help of Warren Buffett's Berkshire Hathaway (NYSE: BRK-B). The next trading day after the deal was announced the shares added more than +20% -- in a single day. This is how profitable catalyst-driven stocks can be. Of course, this gain came on top of a nice run since we added the shares, and all told, the stock gained more than +75% during the time we invested.

   A company-specific trend, like the introduction of new product lines or expansion into new markets.

Apple (Nasdaq: AAPL) was a marginal computer company with a user base of mostly students and design professional who were devoted to its elegantly manufactured products and easy-to-use software. But on October 23, 2001, the Cupertino, California-based company introduced a portable mass-storage device that could hold enormous amounts of data. Of course, we now know this device to be the ubiquitous iPod.

While the same technology had been produced by other companies, Apple's focus on the user experience and unique advertisements led to a digital music player that truly resonated with consumers. This extreme catalyst, in which Apple practically created a market that it still dominates, has added tens of billions of dollars to the firm's market capitalization. More than 150 million iPods have now been sold, and since the product hit store shelves, Apple shares shot from about $9 to nearly $200 -- an amazing catalyst-fueled gain of more than +2,000%.   

   An industry shift, including technological changes or an increasingly favorable competitive environment.

Caterpillar (NYSE: CAT) has long built the familiar yellow heavy equipment used in major public-works projects. In addition, CAT and other heavy-equipment manufacturers saw major business growth thanks to increasing commodity and energy prices in recent years. Caterpillar's lineup of machinery, including the $5 million 797 dump truck -- a 22 foot tall and 48 foot long beast that can slog uphill with 400 tons on its back -- is essential to the mining and energy sectors, and increased commodity prices strengthened demand industry wide. Obviously, this was a major catalyst for the company. Specifically, from 2003-2008 Caterpillar's revenue rose +100%, its profit by more than +220%, and its stock price shot up over +200%. This proves that strong catalysts can move a large company -- Caterpillar is a Dow component -- as easily as it can a small firm.

   A macroeconomic trend such as strong economic growth in a particular country, changing demographics, etc.

The so-called BRIC countries -- Brazil, Russia, India and China -- now account for more than 30% of the world's economy and nearly 50% of its growth, according to the International Monetary Fund. And thanks to this growth, between November 2001 and November 2007 Brazil's stock market added +369%, Russia's +630%, India's +500% and China more than +200%. Of course, the growth of these nations is a strong catalyst for any company doing business there, and while 2008 has seen a slowdown in these markets, the long-term trend remains intact.

With this stellar catalyst in place, we looked to the iShares China 25 ETF (NYSE: FXI), an exchange-traded fund offering broad exposure to the strong growth in China. From the time we added the shares to our "Beat the S&P" Portfolio in March 2005 until November 2007, FXI showered us with gains of nearly +300%.

(2.) Where There's no Catalyst, There's a Cataclysm

The examples above give a quick taste of what catalysts can do. But what happens in the absence of catalysts? Die-hard investors who've been through Wall Street's ups and downs have seen dozens of great stocks lose their footing because there is simply no underlying reason for them to rise. One example is the nation's most recognizable newspaper publisher, The New York Times Co. (NYSE: NYT).

The Times has long been considered a journalistic standard, and for years it generated a strong, stable profit. Circulation was stable, and newspaper companies were considered cyclical plays whose fortunes rose and fell with the broader economy and the results of the companies who advertised in their pages. Another day, another edition -- half ads, half copy. What could change?

The whole world changed, and fast. The digital revolution -- a catalyst that catapulted firms like Google (Nasdaq: GOOG) and Yahoo! (Nasdaq: YHOO) as the Times marched into the sunset -- somehow caught newspaper companies off-guard. Moves to retool themselves into broader-based communication companies missed the mark: the TV and radio properties they acquired saw their advertising revenues slip, while viewership and listening habits changed. At the same time, Craigslist and other media started to poach classified advertising dollars, a vital element of newspapers' business model. The hits just kept coming: paper costs rose and delivery costs increased; websites added costs; publishers cut staff to save money, then quality fell and subscriptions waned.

Media companies like The New York Times can still make money publishing newspapers, though not as much as they once did. How long that's possible is anyone's guess, as newspapers in their current form aren't what consumers are clamoring for. What's more, many newspaper executives -- who could have read about the transformation of the media in their own papers -- were somehow slow to adapt to the changing marketplace. The Times and others failed to adapt their products so as to harness the catalysts that propelled the more nimble members of the communications industry. For instance, The Times easily could have bought MySpace.com with what it paid out in dividends in the past decade. It didn't -- but a more prescient newspaper publisher -- News Corp. (NYSE: NWS) certainly did.

This lack of positive catalysts painted an ugly portrait in dollar terms. On August 19, 2004, the day Google went public -- a critical milestone in the advertising world -- The New York Times closed at $42.06 per share. Three years later, the stock had fallen more than -43%. Meanwhile, the S&P 500 added roughly +40% over that period, a gain News Corp., the company with the foresight to acquire MySpace.com and adapt to the new media environment, was able to mirror.

Bottom line: Catalysts work both ways -- if you have them, you set the pace. If you lack the vision to take advantage of them, the other runners quickly pass you by, and catching up may well prove impossible. 

(3.) Our Ratings Make it Easy to Judge Catalyst Strength

The concept is simple -- if an investment isn't poised to benefit from a major positive catalyst or combination of several catalysts in the coming months and years, then you should look elsewhere. But if a stock IS benefiting from one or more important catalysts, then these catalysts should propel the shares sharply higher, leading to big gains for early investors. 

Because this catalyst model forms the basis for all of our recommendations, we provide complete details on this important concept within all of our Market Advisor issues. And to help you gauge the strength of a particular catalyst, we also include our proprietary StreetAuthority Catalyst Rating system...

StreetAuthority Catalyst Rating What it Means Five Stars --> These stocks are benefiting from the strongest catalysts available in today's market. We expect them to deliver triple-digit percentage gains in the next year or two. Four Stars --> These companies are poised to profit from positive news events, trends, or other catalysts. We expect them to handily outperform the broader market during the next year or two. Three Stars --> These stocks are benefiting from one or more positive catalysts. Although these catalysts aren't strong enough to lead to dramatic share price outperformance, we expect these stocks to slightly outperform the broader market.  Two Stars --> These stocks have one or more identifiable catalysts, but these catalysts are relatively weak and are unlikely to provide a major boost to the shares. We expect these stocks to underperform the market during the next year or two. One Star --> There are little or no identifiable reasons for these securities to increase in price in the coming year or two. Because of a lack of positive catalysts, we think these stocks are "dead money."

As you can see from the table, our rating system makes it as simple as possible to judge a stock's catalysts and potential gains... if a stock has a five-star rating, you can expect triple-digit returns. With one star, you might as well put your money in your mattress, because it's not going to grow.

But you don't have to just take our word about the importance of investing in companies with strong catalysts and the reliability of our StreetAuthority Catalyst Rating system -- we have the results to prove it. By identifying great companies with strong catalysts, we've handily outperformed the market in recent years. In fact, our "Beat the S&P" Portfolio has roughly tripled the performance of the S&P 500 since 2003.

In addition, we've included a couple of specific examples below to drive home exactly how powerful our rating system is and the sort of returns investors can expect by following its guidelines.

---

(4.) Powerful Catalysts = Powerful Gains
 
MasterCard (NYSE: MA) -- MasterCard is one of the world's leading processors of electronic payments, clearing millions of transactions an hour for almost 25,000 financial institutions. The credit-card company doesn't actually extend credit to card holders -- it's purely a back-office operation. It derives revenue primarily from transaction fees -- every swipe of a MasterCard puts more cash in the company's coffers.

When we first added MasterCard shares to our portfolios in 2006, we highlighted several important factors that led to its five-star catalyst rating.

High barriers to entry protect market share:  Because it takes decades of time and billions of dollars to build a global electronic payment network of merchants and banks, MasterCard's business is protected by significant barriers to entry. The industry is essentially a duopoly, with MasterCard and Visa (NYSE: V) dominating the business and processing 83% of transactions, according to CardWeb. This gives MasterCard a sustainable and all but impenetrable advantage over any would-be competitors. Discover (NYSE: DFS), for instance, was launched in 1985. Even after more than 20 years of business, it's mired in fourth place in terms of transaction volume, with only a 4% market share and dim prospects against its larger rivals.

The trend toward a cash-free economy: Knowing that MasterCard was well protected from competitors, we turned our attention to catalysts. The company was benefiting from one of the strongest long-term catalysts we've ever encountered -- the rapid, seemingly unstoppable trend toward greater use of electronic payments like credit and debit cards. About 40% of all transactions in the United States were paid for with plastic -- either debit, credit or prepaid cards -- in 2005. By 2011, cash transactions will be the minority, with electronic payments being used in 55% of U.S. commerce.

Strong results in foreign markets: Similar to the story in the U.S., we also predicted credit-card usage was set to explode in emerging markets like China. 

Here's what we had to say back in 2006...

"It's not hard to imagine Chinese credit card growth of +75% to +100% annualized over the next few years as Chinese consumer spending on cards rises towards international norms. That spells years of growth ahead for MasterCard."

That proved to be right on the money, and foreign markets continue to drive growth for the company. And the the firm is far from done expanding its business...

Recent Citigroup research found that 58% of Chinese card holders use their cards only for major purchases, not for little everyday expenditures like lunch or dry cleaning. To consider a parallel for this potential growth, think about the American wireless market. Ten years ago, most cell-phone users would only make a call in case of an emergency. Today, we don't think twice to call to clarify whether you wanted skim or soy in your latte. Chinese credit card use should mimic that trend -- plastic is just too convenient.

The end result of all these catalysts? Almost a triple-digit gain, which was implied by our five-star rating. In fact, readers who followed our initial recommendation managed to lock in total returns of +235% from MasterCard between December 2006 and June 2008 -- a period of only 18 months.

However, don't make the mistake that the performance of MasterCard was just a one-hit wonder. Thanks to our focus on catalysts, we've uncovered dozens more winners, including many that produced gains even greater than those seen by MA. The following pick, for example, provided gains that many investors rarely, if ever, experience firsthand.

Central Europe Distribution Corporation (Nasdaq: CEDC) -- In late 2004, we bought shares of this integrated spirits business, which makes, imports and distributes liquor, beer and wine in Poland. The company traces its roots to an unusual business venture: the importing of Australia's Foster's beer to Poland by a company based in Philadelphia. But the venture was a success, and growth followed.

By 1993, CEDC had created a direct supply network. During the ensuing years, the company bought 18 regional distributors -- always retaining the sales team and managers who had contacts at the liquor stores, gas stations, bars and restaurants where the products were sold. It also acquired a wine importer and two vodka production facilities. In less than 20 years, CEDC functionally created a complete liquor distribution platform across the Eastern European nation. But we didn't think the company (or its stock) was done just yet. In fact, we pinpointed a couple of catalysts behind the shares:

Expanding footprint and weaker competition:  While either one of these would be an enviable catalyst, CEDC featured them both. For decades the Communists controlled alcohol through state-run enterprises. After the shroud of communism was lifted from Eastern Europe, small, mom-and-pop liquor distributors took over. CEDC has been able to buy these operators and turn its market share into market dominance.

As its name implies, this company isn't looking to dominate the market in Poland alone, it's setting its sights on the entire Central European region, including countries like the Czech Republic, Hungary, Austria and Germany.

Poland's Entry to the broader EU market: Central Europe is a nice enough place to do business, but the broader European Union, which Poland joined in 2004, comprises 500 million consumers. That's a market larger than the United States. If CEDC can harness its methodical market-development tactics throughout the EU, it can tap into massive demand and and huge growth potential. The company today produces two liters of vodka a year for each of the 38 million people in Poland. Its ability to grow will wane when it's producing 924 million more liters a year -- enough to offer two liters for each person in the EU.

Based on these strong catalysts, we were bullish on CEDC's outlook. In fact, here's a look back at our comments when we added the stock to our "Beat the S&P" Portfolio:

"Going forward, the firm is likely to grow at a +20% annual clip as it continues to expand its footprint and acquire its weaker competitors. With little competition and the benefit of Poland's recent introduction into the European Union on its side, CEDC should have no trouble delivering outsized gains in the months and years ahead."

Once again the catalyst advantage is clear: investors who mirrored our purchase of this stock in their portfolios posted another triple-digit return. We added CEDC shares in December 2004 and saw a total return of +290% by June 2008. And despite a pullback in the shares, the five-star catalysts are still at work! 

---

(5.) The Newest Five-Star Stocks

Of course, while these past winners are impressive, new readers want to know where they should invest now. What stocks have the likelihood to be the next triple-digit gainers on the strength of their catalysts?

To answer that question, let's take a look a couple of stocks with StreetAuthority Catalyst Ratings of five stars that we recently added to our portfolios. These ideas have strong catalysts that should help them march steadily higher in the coming months and years...