The One Thing Every Stock You Own Should Have...

Jimmy Butts's picture

Monday, December 19, 2016 - 12:00am

by Jimmy Butts

On the surface, becoming a successful investor seems easy: Simply buy low and sell high. The bigger the difference between your entry point and exit point, the more money you make.

The problem is that it's not quite that simple.

But it's that very maxim that forms the foundation of investing -- the pursuit of finding that next great deal. That's why, over the years, scholars and investors have developed an arsenal of financial tools, models and metrics to help pinpoint stocks trading for less than they are really worth (or shorting stocks that are trading for more than they are worth).

However, even once you find a stock that is trading well below its "fair value" there are still many potholes to steer clear of en route to a profit.

Take auto manufacturer General Motors (NYSE: GM), for example. The stock currently trades around $36 per share. Its price-to-earnings ratio is at about a 15% discount to its 5-year historical average. Investment firm Morningstar currently gives GM a "fair-value estimate" of $44 per share, that's a 22% premium to its most recent price.

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So on paper this looks like a great investment. But investors are advised to proceed with caution. The automaker's debt has ballooned to $71 billion, up from $12 billion in 2010 when it exited bankruptcy. It has a massive $27 billion unfunded pension liability, and to top it off the company has been heavily involved in subprime auto loan lending.

In short, the future doesn't look great for General Motors. But for the sake of argument, let's say that the company combats these major concerns and gets back on track, but it takes ten years to do so. All of a sudden that 30% upside over ten years doesn't look so appealing. Especially when you could be invested elsewhere that could possibly get you 30% in a year or two.

A major mistake of many investors is ignoring the time aspect involved with investing. The opportunity cost of holding an investment that squeaks out a meager 30% in 10 years can be devastating to building long-term wealth.

Granted, it's hard to say for certain when any investment will reach its full potential. The hope, naturally, is the sooner, the better.

When researching my next investment idea for my premium newsletter, Top Stock Advisor, I, of course, take the typical financial route. That is examining financial statements, reading through SEC filings, discounting future cash flow, comparable analysis, and so forth. But while I'm doing this research there's always one thing that I'm always looking out for. It's not a special line item you'll find on a company's balance sheet or anything of that nature. What I'm looking for is essentially a rogue wave that could disrupt my or any other analyst's model.

In short, I'm looking for a catalyst.

What A Catalyst Is, And How It Makes Investors Rich
The textbook definition of a catalyst is "an agent that provokes or speeds significant change or action." In the business world, anything that tilts the playing field and can either work for you or against you.

Simply put, a catalyst can disrupt the financial models and attract unusually strong buying interest -- or spark a selloff -- in a stock or industry group. They can come from almost anywhere: a management shakeup, a disruptive new technology, an accretive acquisition, a major court ruling, a shift in Federal Reserve monetary policy...

Sometimes a catalyst can be as innocent as a change in weather. For example, unseasonably cold and snowy winters can be a boon for utility companies that supply heat to those regions. On the other hand, those same cold and snowy conditions can hamper inbound and outbound shipments and in the extreme can affect such things as auto sales, as happened in the winter of 2014.

Other times a catalyst is so massive that it not only dramatically changes the trajectory of a company's share price, but revolutionizes industries and has a major impact on our everyday lives.

There's no more obvious example than Apple (Nasdaq: AAPL), which at the turn of the century was a marginally profitable computer company with a small but loyal user base. That all changed on October 23, 2001.

That was the day the company released a new portable mass-storage music device that could hold enormous amounts of data: the iPod. That innovation, along with the iPhone, revolutionized first the music industry, then the mobile phone industry, and made Apple one of the most profitable companies on the planet.

The loyal user base that invested in Apple prior to the iPod launch has enjoyed a stellar ride and made a windfall of cash along the way:

Apple provides a textbook case study on just how powerful catalysts can be. Of course, it's easy to look back now and see that an investment in the fledgling tech company back then was a no-brainer. But back then we had no way of knowing for sure that the iPod would spawn an entire ecosystem of phones, tablets and other devices.

Most companies will never be mentioned in the same breath as Apple, but you can see that catching the wave of a major catalyst can be life-altering. For the most part, every stock in my Top Stock Advisor portfolio is benefiting from at least one catalyst. My advice: make sure you every single stock you own has the potential to benefit from at least one strong catalyst in the near future, if it's not already.

Is This The Next Big Catalyst?
There's another catalyst set to boost specific industries in the years to come that I have my eye on: the world's rapidly growing middle class.

According to accounting firm Ernst & Young, the global middle class is defined as those earning between $10 and $100 per day. It's between these levels where consumers start having disposable income that allows them to spend money on cars, televisions, computers and travel.

By 2030, two-thirds of the global middle class will be residents of the Asia-Pacific region. That's up from just under one-third in 2009. And China alone is expected to have a staggering one billion members of the middle class by then.

While this growth will benefit economies and businesses of every type, I've identified one sector, and a leading stock within it, set to explode with the rise of Asia's middle class. I believe that this catalyst will give it a sizeable tailwind that should propel its stock price forward for the next 5-10 years.

That's why my most recent stock pick fits perfectly with the rest of my Top Stock Advisor portfolio. This elite and dependable group is designed to outperform the market without exposing investors to unnecessary risk by focusing on long-term market trends. If you'd like to learn more about Top Stock Advisor and get the names and ticker symbols of all my picks, go here.

Jimmy Butts 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.