Gains in the stock market are generally the result of growth over a long period of time. However, you’ll often notice a stock that makes a dramatic, single-session run.
For example, when the biotechnology company Moderna announced positive COVID-19 vaccine results, the stock climbed 16% in a matter of hours as investors saw a profitable pandemic related opportunity ahead. Those short-term gains are far better than you’d expect to see from most investments over the course of a year.
When beginners see runs like these in individual stocks, they tend to dive in headfirst — just before savvy, experienced investors start to cash in on the gains, leading to declines in the stock price. This action is referred to as chasing the catalyst.
It’s a lot like chasing a panther. Once you see it, it’s gone, but it could turn around and bite you.
However, it is possible to get in before these massive moves happen. That’s how many big money investors became big money investors, beating benchmarks like the S&P 500 index and Nasdaq composite index.
Of course, if you get in before the catalyst takes place, you’ll benefit from the resulting dramatic gains and be able to cash out and take profits instead of following an investment strategy centered around trying to chase the catalyst and being left with losses.
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News That Lead to the Biggest Gains
Catalysts are market events that lead to movement in the price of a stock. There are positive and negative catalysts that lead to positive and negative movements. Some catalysts have the potential to lead to the explosive gains you’re looking for, while others do not. The catalysts with the most potential to lead to explosive gains include:
New Product Launches
Apple holds events once or twice per year. These events are where the company announces new product launches. Purchasing Apple shares before these events usually bodes well, as the announcements tend to lead to dramatic gains.
Although not all companies have scheduled annual or biannual events surrounding the release of products, many of them give clues as to when new products are coming. Purchasing shares before these releases can result in large profits.
These catalysts move the needle most in growth stocks in the technology and biotechnology sectors.
Positive Quarterly or Annual Results
In the United States, publicly traded companies are required to provide quarterly updates. The fourth quarterly update for each year generally comes in conjunction with the results for the entire year.
These updates are jam-packed with financial data, as well as updates from the company on operational progress made during the quarter or year, and plans for the company ahead. They are hotbeds of fundamental data. Although all this information is important, there are a few bits of data that, when they fall in line, have the potential to lead to dramatic gains. They include:
- Earnings Per Share. Earnings per share (EPS) is calculated by dividing the total profits or losses created by the company in the period being reported by the total number of outstanding shares. EPS is a metric investors and analysts alike follow closely. Analysts predict the expected earnings on the stocks they cover. If a company’s actual reported EPS outpaces analyst expectations, the value of the stock has the potential to see dramatic gains. Of course, if earnings fall below analyst expectations, the stock could experience painful declines.
- Revenue. Earnings reports also tell how much revenue the company generated in the period the report covers. Analysts also attempt to predict the amount of revenue companies will generate. Should revenue outpace analysts’ average expectations, the stock could climb; if revenue falls short, the stock could tumble.
- Guidance. In most cases, companies provide guidance — their expectations for revenue, earnings, and other important metrics — for the quarter or year ahead. If the company’s guidance is overwhelmingly positive or overwhelmingly negative, the stock generally climbs or falls respectively.
- Better Than Expected Corporate Progress. Finally, investors also pay close attention to the work companies are doing in their space. For example, if a tech company recently released a new product, investors will want information on sales of that product, the marketing efforts that were made, and the data that was gathered. If the investing community believes the company made strong progress toward reaching its goals in the period covered by the report, the stock has the potential to generate compelling gains.
Positive Data or Regulatory Progress
This type of catalyst mainly applies to biotechnology, pharmaceutical, and other companies that produce new medicines. The regulatory process surrounding the development of a new medicine is a pretty intensive one — for good reason — and includes several milestones that can act as catalysts for big stock moves.
Because the development process involved in creating a new medicine often includes exposing people to new chemicals, drugs, or other compounds, the entire process is heavily regulated. It’s important that medicine helps you rather than hurts you. As a result, the development process generally consists of preclinical studies followed by Phase 1, 2, and 3 clinical studies. These are designed to prove that new drugs are effective, safe, and well-tolerated among a specific patient population.
In order to move forward with a clinical study in which a new drug is tested in a human population, companies or research institutions must get an Investigational New Drug (IND) Application approved by the FDA. When a company’s IND is approved, the value of the stocks tied to them tend to see runs in value.
Along each step of development, biotechnology companies issue reports sharing data from their studies. When these reports are released, if the data is positive and investors see potential value in the therapy, the stock price can move in an overwhelmingly positive way.
At the end of the clinical process, the data is submitted to regulatory agencies like the U.S. Food and Drug Administration (FDA) to seek its approval to sell the new medicine. When these applications are submitted, biotechnology companies are in the home stretch of bringing their product to market. When the FDA accepts these applications for review, the company’s stock generally climbs dramatically.
Finally, if the FDA agrees that the data shows the benefits of a new drug outweigh its potential side effects, the agency will approve the drug for commercialization in the United States. This is yet another catalyst with the potential to make a stock chart look more like a rocket path.
Some companies release weekly, biweekly, or monthly sales reports following a new product’s release. The idea is to share their success and growth with investors between quarterly and annual financial reports.
Should these reports show that the company is generating better-than-expected sales, excited investors will push the value of the stock up.
How to Find a Stock Catalyst Before the News Happens
The key to making the most money possible when these events take place is investing in the stock before they happen. The process is a lot like the strategy used to take advantage of short squeeze events, but these investments are much less risky.
Option #1: Scour the News for Quality Stocks With Upcoming Events
Unlike the strategy used to find and take advantage of short squeezes, you won’t be looking for heavily shorted penny stocks. Instead, you’ll want to focus your attention on big names that are generally good investments regardless of a coming catalytic event.
One of the best ways to find these stocks is to read financial media for ideas. Take some time to read the top stories on stock news and market research websites such as Forbes, MarketWatch, and Barrons.
Look for articles that have the name of a specific company in them. In most cases, these websites will only talk about a specific company when an event has already taken place or one is coming soon. These are often product-launch-style event announcements that are difficult to find elsewhere.
When you find a story about a stock you’re interested in with a catalytic event coming, make a note of the stock, the coming event, and the date the event is expected to take place for further due diligence.
Option #2: Use Earnings Calendars
Finding upcoming quarterly and annual financial reports is a simple process. There are several free calendars online that share the dates of important upcoming reports. Some of the most used financial report calendars include:
To find upcoming financial reports with the potential to lead to large gains, simply load one or more of these calendars and look for a stock you may want to invest in. When you find one, make a note of the stock and the earnings report date for further due diligence.
Option #3: Use Biotech Watch Tools
There are also several biotechnology calendars available for free online that tell you about upcoming regulatory updates and clinical results. The best calendars for finding these types of catalysts are provided by:
- BioPharmCatalyst.com. The BioPharmCatalyst.com FDA Calendar provides information on upcoming updates in the regulatory process. These include both Advisory Committee meetings — which give insight into whether a new medicine is likely to be approved — and the dates on which the FDA is required to either approve or reject a new medicine, called Prescription Drug User Fee Act (PDUFA) dates.
- RTTNews. RTTNews provides a comprehensive Clinical Trial Calendar. This calendar gives you the dates that data from ongoing or completed clinical trials will be released. Because biotechnology companies simply can’t provide the exact day on which data will be released, the dates on this calendar are expressed in quarters rather than specific dates.
Simply use these tools to find stocks with upcoming regulatory or clinical events you find interesting. Make a note of the stock, the event, and the date of the event for further due diligence.
How to Decide if the Upcoming Event Is Worth Investing In
This is where your research skills will be put to the test. Before making an investment, there are two questions you need to answer.
Is the Stock Worth an Investment?
Regardless of any upcoming catalyst, it’s never a good idea to make an investment in a company you don’t believe has the potential to grow over time. As such, it’s important that you do your research and decide whether the stock is worth an investment on its own merits, with or without the upcoming catalyst. If so, go on to answer the next question. If not, don’t take on the risk; there are plenty of other opportunities out there.
Your criteria for a strong investment will be unique, depending on your style of investing, your appetite for risk, the amount of money you have to invest, your long-term goals, and several other factors. Deeply understanding the fundamentals of a stock before buying it can help to manage the risks of investing in a company, regardless of future catalysts.
Is the Catalyst Likely to Be Positive?
If you’ve decided the stock you’re researching represents a strong investment choice, with or without the catalyst, it’s time to dive into the catalyst itself. To do so, you’ll need to do your research and determine what the outcome is likely to be.
For example, if you’re interested in investing in Apple before a product launch, search for articles surrounding what product might be coming, the product’s expected features, and expected pricing. Once you’ve read enough information to decide whether you believe the product will be successful, you’re ready to move on.
If the stock you’re interested in has an earnings report coming up, look for articles by experts outlining what the investing community is expecting. If expectations are that earnings and revenue will beat analyst projections and that the company made strong progress on its operational endeavors, you may be in for gains once the financial report is released.
In the biotechnology space, you’ll need to dig into the previous data to decide if you think future data will be positive or whether the regulatory authorities are likely to approve the treatment. Of course, if a treatment is approved, the stock has the potential to skyrocket.
In other words: Research everything you can surrounding the coming catalyst and make a determination as to whether the event is going to be positive or negative. Ultimately, you’re looking for positive events.
Making Your Move
Once you’ve found a stock you believe is a good investment on its own merits, and you believe that a coming catalyst will be positive, it’s time to make your move.
Make sure to invest in the stock at least a few days before the event, but not too far before. Leading up to an event, a stock can sometimes fall if investors are worried about the impact of a potentially negative event. You don’t want to incur those losses. So, you might wait until the day before the event is scheduled to take place, then make your move.
It’s OK to invest far before the catalyst when you’re investing around data releases that are timed in quarters rather than specific days. In these cases, you don’t have much of a choice but to invest early if you want to get ahead of the catalyst.
There’s Always Risk When Investing
Although this strategy isn’t quite as risky as a short-squeeze strategy or other high-risk, speculative investments, there is no such thing as an investment without risk. Aside from the general risks that come with investing, making a move ahead of a catalyst carries the risk of the event being negative.
When a catalytic event is negative, you will see a negative impact on the value of the stock. Although research will give you a good idea of what is likely to happen, there’s no way to look into the future and know definitively that the outcome of any event will be positive. As such, this strategy does come with an elevated level of risk.
Tips for Limiting Risk With this Strategy
Unlike hedge fund managers, most individual investors simply can’t afford to accept excessive risk no matter what strategy they follow. When taking advantage of upcoming catalysts, there are a few things you can do to limit your risk exposure:
- Practice Diversification. You never want to put all your eggs in one basket. When investing in a single stock, never risk more than 5% of your total investment portfolio on a trade. This will ensure fluctuations in the stock’s price won’t have a disastrous effect on your whole portfolio if things turn negative.
- Do Your Research on the Catalyst. Research is the foundation for most successful moves in the market. While there’s no way to tell exactly where share prices will land when the news is released, your research will give you a strong inclination of whether the value of the stock will move up or down.
- Set Stop-Losses. Regardless of how good your research capabilities might be, surprises are commonplace in the market. To avoid significant losses as a result of downside volatility, use stop-loss orders. These orders result in the automatic sale of stocks if they fall to a specific price.
- Watch Activity Before the News. Oftentimes, investors flood to a stock before news is released, sending valuations to extreme highs. In these cases, even if the news is good, the stock may fall. So watch activity leading up to the event. If the stock becomes overvalued, it might be worth jumping out and taking profits before the news breaks.
Getting ahead of stock market catalysts can be a fruitful endeavor. The goal of investing is to make your money grow, and if you can outperform the market and get a year’s worth of growth in a single session, you’re doing well.
However, investing is not a get-rich-quick scheme. This strategy and others like it are research-intensive. If you attempt to take shortcuts on your research, you will likely lose. So, this isn’t the strategy for the investor who doesn’t have the time or patience to dive deep into companies’ data, stories, or ideas.
Nonetheless, if you have the willingness and ability to do the research and make sound investment decisions ahead of major events, you’ll likely reap incredible rewards by doing so.