How To Avoid 'Dead Money'? Don't Buy Another Stock Unless It Has THIS...

Nathan Slaughter's picture

Thursday, November 21, 2019 - 2:30pm

by Nathan Slaughter

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 (NYSE: WMT) 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...

SYY chart

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.

What Is A Catalyst?

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 tale... 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. 

These are the type of events I prize -- and they have led to quick gains.

Action To Take

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.

In fact, my colleague Dr. Steven Leeb may have found the catalyst of the decade.

You may have heard about the upcoming 5G technology, and how will affect the life of every single American. There's just one problem -- and it's being totally ignored by the mainstream financial media... 

According to our research, there's a "fatal flaw" with 5G that will make the rollout impossible without one small company's key technology. The good news: if you buy these cheap shares today, you could see a life-changing gain over the next few months. But there may be only a few days left before Wall Street catches wind of this company and spoils the party for everyone. This report shows you how to get started right away.

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.