How To Avoid ‘Dead Money’? Don’t Buy Another Stock Unless It Has THIS…
As some of you know, I’ve been involved in the financial business for a long time. And you don’t last this long without learning some things the hard way. But once you do, you’re liable to never forget them.
For example, back in the fall of 2007, I said a few bullish things about wholesale food distributor Sysco (NYSE: SYY).
I started with the basics, telling readers how the company used the nation’s largest private trucking fleet to hand-deliver fresh meat, fruit and vegetables to customers like school cafeterias and fast food outlets.
At the time, it had tight relationships with 400,000 clients that hauled in $34 billion in annual sales. That made the firm larger than its four biggest competitors combined. And this is definitely an industry where size matters. Powerful economies of scale and an efficient distribution network had allowed Sysco to undercut rivals — making it the Walmart of food distribution.
Needless to say, those low prices were attracting customers. In fact, organic sales growth was running double the industry average and the firm still had the widest operating margins in the business. Earnings had been climbing at a healthy +17% pace for several years. Looking ahead, I liked the fact that Sysco was flexing its muscles by negotiating better purchasing contracts with suppliers. And with other supply chain efficiencies being wrung out, I saw even lower costs — and thus more opportunity to consolidate market share.
As it stood, this was already the dominant leader in a fragmented $200 billion market. And there were other perks: recession-resistant demand, predictable cash flow, generous dividend hikes, and stock buybacks along with superior returns on equity above 30%.
These are the hallmarks of a great company. Best of all, the shares were trading at a nice discount to my fair value estimate.
All of this sounded pretty tempting. But one look at the stock chart below will tell you why I lost faith…
What Is A Catalyst? And Why They Matter…
After three years, shares of Sysco were stuck.
Now, I still believed the stock was worth a lot more. But I didn’t bite again. And I’ll tell you why…
There just weren’t any real catalysts to excite investors and get the stock moving.
Based on my calculations, shares had about 45% to run to reach my fair value estimate. That’s nothing to sneeze at — if you can make that trip in 365 days. But what if it takes two years to reach fair value? In that case, your annualized return drops to +21%. And if the journey takes three years, then your money made just +13% a year.
On the flip side, if you can latch on to a fast-moving stock that makes the same trip in six months, then your annualized gain shoots up to 104%.
Here’s the moral of this story…
There are two components that influence investor returns: a stock’s upside potential and the time it takes to realize that potential. Obviously, you want the shares to reach their final destination sooner rather than later. That’s where catalysts come into play…
Catalysts are the high-octane fuel that make speedy gains possible. Basically, a catalyst is something that creates a dramatic impact on a company’s fortunes — and triggers a rush into its stock. This might be the launch of a new product, or expansion into a booming market, or a favorable regulatory change. It might be a fat government contract for a defense company, a major new oil discovery for an energy producer, or long-awaited FDA approval for a pharmaceutical firm.
Some catalysts are company-specific, like a clever acquisition. Others play on larger macro-economic themes, such as interest rates, consumer spending patterns and foreign currency fluctuation. Many of the strongest catalysts don’t fit neatly into any category at all.
Regardless, these are the type of events I’ve learned to prize when looking for portfolio picks — and they have led to quick gains.
In this case of Sysco, there was plenty of ground to cover before the stock would be fully valued. That’s a good thing. Unfortunately, the shares are traveling by horse-drawn wagon to get there. That’s why I finally learned my lesson. I ditched my recommendation and moved on to greener pastures.
I don’t know about you, but I prefer stocks that can get from point “A” to point “B'” in a hurry. That’s why I don’t recommend a single stock to my subscribers unless it has a solid catalyst in place. And preferably, it has more than just one…
If your portfolio seems to be asleep, perhaps it’s time to wake it up. Look for catalysts like the ones I mentioned above if you really want to enjoy truly life-altering gains.
Speaking of which, my colleague Jimmy Butts has released his annual predictions report, and it’s chock full of picks with huge potential catalysts…
This report has offered multiple triple-digit opportunities in the past. And this year’s report could be the most profitable yet.
From the U.S. dollar to driverless trucks to breakthrough cancer treatments and more… If you’re looking for some “home-run” ideas for your portfolio, then I can’t think of a better place to start.