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I specialize in trading stocks with catalysts.

A catalyst can be new information like an earnings event, industry conference, an analyst note, an update from the company, legal action, a short-seller report or an activist investor—basically any news that has the potential to cause increased volatility and volume into a stock.

For example, earlier this week Stitch Fix (SFIX) shares blasted higher after it released its earnings report.

 

 

SFIX saw its shares gap up after a positive earnings release this week.

Now, if you’ve been around the block for a while then you might already be familiar with earnings catalysts.

That’s why today I want to take this moment and do a deep dive on other types of catalysts, and how they impact stocks.

I’ll be covering what some of the most common bullish and bearish catalysts along with examples. Even if you trade “the news” it is still important to know what is happening that way you can understand how position size correctly and manage risk.

 

Bullish & Bearish Catalysts

Conferences:

Firms will often go to industry conferences to showcase their latest technology, products and services. It is a great opportunity for them to speak with analysts and customers.

For example, just the other day, we saw a nice pop in Esports Entertainment (GMBL)

 

 

The catalyst?

The company was presenting at the Benzinga Global Small Cap Conference

 

As new information hits the newswires traders are reacting to it. In this case, it appears they liked what they heard and it drove the stock higher.

 

Activist Investor

Sometimes people like to follow investors with strong track records. For example, traders often react to investments made by Bill Ackman, Warren Buffett, Carl Ichan etc.

 

Source: CNN Business

 

This can also work the other way.

For example, activist investors sometimes take short positions too, in this case, it can have a negative effect on the stock.

 

Analyst Reports

Just like certain investors have clout so too can analysts.

Of course, not all analyst actions are the same. For example, if a particular analyst has been bearish the stock they are covering, and all of a sudden they become bullish, this can potentially be very positive for the stock.

On the flip side, a downgrade could be bearish and put pressure on the stock.

 

Analyst upgrade/downgrades are tricky…they don’t always move stocks so it is important you get familiar with who the analysts are and what type of clout they have.

 

Legal Actions

One of the hot topics right now is the potential legalization of marijuanna. Any type of legal news upcoming or new has the potential to move stocks in the sector in either way.

 

Short-Seller Reports

Let’s face it, most Wall Street analysts are long biased. Very rarely will you see them issue out negative reports. However, that’s where independent research firms like Citron and Muddy Waters come into play.

And unlike private banks, they issue their research for free. And like activist investors, the top short-sellers have clout too.

Company Updates

Earlier this week, shares of Greenwich LifeSciences (GLSI) took off after the company released positive data pertaining to its breast cancer treatment.

 

Of course, it can also work the other way too…especially in the biotech space…where companies can literally thrive or die from its data results.

 

How Do You Prepare For Catalysts

A lot of times you can find upcoming catalyst information directly on the company website.

For example, here are the events that are upcoming in Netflix (NFLX):

 

 

Of course, the biggest catalysts are ones you can’t prepare for. They are breaking news stories that hit the wire. These tend to have the greatest volatility and offer the most opportunity.

But volatility is a double edge-sword. Fast moves can work in your favor but they can also work against.

The key is to be aware of what is happening and have a plan.

 

Author: Kyle Dennis

Straight outta college Kyle Dennis taught himself to trade, and then made over $7 million in trading profits by the time he was 28 years old. Kyle reveals how to find, track, and profit from lucrative trades for exceptional profits. Thousands of traders follow him every day to learn how to target these high probability trades.

Understanding the 2-for-1 Stock Split

A t any given time, any publicly traded company has a finite number of shares outstanding. A stock split is a tool that companies can use to increase their number of outstanding shares, and a 2-for-1 stock split is one of the most common types. While it’s easy to think that more is always better, the reasoning behind stock splits gets a little more complex.

Key Takeaways:

  • A stock split is a corporate action that increases the number of a company’s outstanding shares by dividing up each single share into multiple shares.
  • A 2-for-1 stock split doubles the number of shares any one shareholder owns while dividing the stock price in half.
  • While there is some practical rationale behind stock splits, such as increasing liquidity, investors should be wary of investing based only on a stock split action. The split doesn’t change any underlying business fundamentals.

What Is a 2-for-1 Stock Split?

Image via Unsplash by austindistel

A stock split is a corporate action that the board of directors at a company can take. All companies that are publicly traded have a set number of outstanding shares. The stock split action increases the number of outstanding shares by dividing each share into multiple shares, which decreases the stock’s price.

Companies can split stocks in a few different ways, including 3-for-1, 3-for-2, and 5-for-1 stock splits, but a 2-for-1 stock split is one of the most common types. When a company chooses to take this particular action, the number of shares doubles and the stock share price gets cut in half.

When stock prices increase, it has both positive and negative effects on the company. A price increase can indicate a vote of confidence, but new investors may have a harder time purchasing blocks of shares if prices go too high. As a result, companies may decide to issue 2-for-1 stock splits to make shares more affordable.

A stock split doesn’t affect a company’s market capitalization. That figure will stay the same. Think of it this way: If you exchange a $100 bill for two $50 bills, you still end up with $100 total. So, when a company does a 2-for-1 stock split, each stockholder ends up getting an additional share for every share that they hold — but each share’s value is cut in half. In other words, a pair of shares is equal to the original value of one pre-split share.

A Real-World Example of a 2-for-1 Stock Split

In April 2015, Starbucks (NASDAQ: SBUX) did a 2-for-1 stock split. It was the ubiquitous coffee brand’s sixth stock split as a publicly traded company. The rationale was to increase liquidity and offer a more attractive share price. The move cut the share price for Starbucks from around $95 to about $48.

How Does a 2-for-1 Stock Split Work?

In general, a company’s management team and board of directors want to maximize value for their shareholders. If they think that the price of one stock share is getting too expensive, they may choose to do a 2-for-1 stock split so that smaller investors can continue to invest in their stocks. If the price of a share is so high that it prevents smaller investors from purchasing stock, it will limit the number of investors, which may restrict the stock’s upside price potential.

Let’s say you have stock that is currently sold at $150 per share, and the company issues a 2:1 stock split. You (and every other shareholder) would now own two shares for every one share you had owned previously, but for $75 per share. If you previously had 10 shares for $1,500 in total value, you’ll now have 20 shares for that same value. You keep the same total value you had before, but now the shares may be more accessible for a bigger number of potential investors.

When a company does any kind of stock split, they will announce their intention to do the split and indicate that the change applies to shareholders as of a given date. Shortly after that set date, shareholders receive their additional shares.

What Is a Reverse Stock Split?

Companies can also do what’s known as a reverse stock split, which basically works in the opposite way as a traditional stock split. With reverse stock splits, companies reduce the number of outstanding shares, causing the price to rise. In a 1:2 reverse stock split, if you have 10 shares at $150 per share, you’ll end up owning 5 shares worth $300 per share.

Companies may choose to do reverse splits to gain respectability by having a higher share price, or they may do it to prevent their stock from getting delisted because the share price is too low.

Why Would a Company Do a 2-for-1 Stock Split?

A stock split has a few main advantages for the company making that move. Companies may choose to do a stock split for one of the following reasons:

  • Increasing the liquidity of a stock: Companies may feel that reducing their stock price will increase the stock’s liquidity because the split makes the stock more affordable to smaller investors. The theory behind the move is that investors will become more likely to buy the lower-priced shares after the stock split, thereby increasing the trading volume of the stock and its overall liquidity.
  • Increasing the stock price: Sometimes, a stock split leads to the stock price increasing after the initial decline in price. This happens when shares become more affordable to investors. When investors buy more of the stock, it may drive the price up again.
  • Boosting investor perception: Investors may take a stock split as a positive sign that share prices have increased. Investors may perceive that the split offers value by making the stock price more accessible. This may also motivate investors to buy more shares after the split, which may again boost share price and the stock’s overall value.

Stock splits often offer another perk for investors: They make it easier to re-balance portfolios. Because each trade now requires a small percentage of an investor’s portfolio, it becomes easier to sell shares to buy new ones.

Drawbacks of Stock Splits

Stock splits also come with some disadvantages. Beginner investors need to be careful because a stock split isn’t always a good thing. When a company does well, a stock split is almost inevitable with growing book value and dividends. However, this can lead to the false perception that stock splits mean automatic benefits.

Volatility Can Increase…

Stock splits have the potential to increase volatility in the market due to the changing share price. When more investors decide to purchase stock that’s now more affordable, the stock’s volatility can rise, which can make it a riskier investment.

…While Share Price Doesn’t Always Increase

Sometimes, companies have to do a stock split because they’re in danger of having their stock delisted. Reverse stock splits may often lead to the per-share price going up right after the split, but it may take some time for the company to recover. It’s possible that the stock may not grow in worth at all following the split. New investors run the risk of losing money if they don’t know the differences between stock split types and the reasoning behind them.

Stock Split Psychology

T hough stock splits may have some tangible potential effects (like increasing liquidity), companies often choose to make this move due to the psychology behind it. Companies may worry that as their stock price rises, investors may think the price is too high, and smaller investors may feel that it’s completely unaffordable.

A stock split pushes down the stock price to a level that many investors deem more attractive. The stock’s actual value doesn’t change at all, but the lower price can entice new investors while making existing shareholders feel like they have more shares than before.

For the most part, stock splits don’t really align with financial theory, but companies still take this action constantly. Stock splits are a good example of how investor behavior and corporate action don’t always fit in with financial theory.

This also offers a good reminder that a stock split shouldn’t be the only reason you choose to buy stock in a company. A stock split has no impact on a company’s worth because it is measured by its market cap. While there are psychological and practical reasons why companies choose to split their stock, the action doesn’t change their business fundamentals. In fact, it doesn’t change anything at the company level. Whether you have 10 shares priced at $150 per share or 20 shares priced at $75 per share, you still have $1,500 in stock.

There’s mixed evidence when it comes to stock splits. Sometimes, a stock split can help create a short-term rally in share prices, and some people believe that those results are at least partly due to the increased liquidity.

All in all, if you think of earnings like a cake or pie, stock splits only increase the number of slices you get. They don’t make that cake or pie any bigger. Splits can lead to temporary gains for investors, but they’re typically best viewed as one-off events that won’t automatically improve (or diminish) a company’s underlying quality.

Since the 2-for-1 stock split is one of the most common types of stock splits, you’ll likely come across this action when you’re investing. Understanding what this move means for a company can help you plan out your next investment move.

Author: Kyle Dennis

Straight outta college Kyle Dennis taught himself to trade, and then made over $7 million in trading profits by the time he was 28 years old. Kyle reveals how to find, track, and profit from lucrative trades for exceptional profits. Thousands of traders follow him every day to learn how to target these high probability trades.

There are many catalysts on the table, and sometimes, it can get complicated when it comes to figuring out which one holds the most weight.

If you look at the major catalysts on the table, it’s no wonder why major indices have been relatively flat.

When it comes to catalyst plays, I typically like to look at company-specific ones.

Right now, there’s one area in the market that a lot of traders are interested in…

And I want to teach you what these are all about and how to identify catalyst events in these companies.

The One Area Everyone And Their Brother Are Trying To Figure Out

I’m sure you heard of Special Purpose Acquisition Companies (SPACs).

Now, these are blank check companies and don’t operate in any particular industry, or operate at all, for that matter until the deal goes through.

Rather, these are literal “empty legal vehicles” to raise capital to acquire a company in the future. So for most of a SPAC’s life, the team is looking for potential target companies.

As of late, startups from promising industries – EVs being the prime example – have reverse merged with SPACs to go public without doing the traditional IPO process.

There are known catalyst dates. For example, take a look at these SPACs below.

OPES (12/15), FEAC (12/16), IPOB (12/17), SAMA (12/17), LCA (12/18), PTAC (12/21) RMG (12/28)

Notice how I put dates next to these tickers.

The dates I listed above are vote dates. In other words, shareholders have to vote on the SPAC deal with the target company.

Based on my observation, I’ve seen SPACs run up into these events, and that’s why I think my catalyst runup strategy can help identify these plays.

For example, take a look at Social Capital Hedosophia Holdings (IPOB).

The vote date is expected on Dec. 17. Already, the stock has been running higher. I think there’s a lot of demand for this stock, and some traders don’t want to miss out on the action…

Especially when they look at stocks such as QS and LAZR.

When it comes to these catalyst runup plays, I think it’s important to have a trade plan in place.

Let me show you how one can develop a trade plan around a catalyst event.

So RMG Acquisition Corp. (RMG) has a catalyst date later this month.

Based on this chart, one can identify the buy zone as say $18 – $19 (a previous breakout area), and which can turn into support, in my opinion.

The stop can be 10% below the entry (or lower, depending on the risk tolerance). It’s on the trader to decide what they’re comfortable risking.

The target can be 20% (or whatever the trader is comfortable with). For me personally, I aim for base hits, and regardless of whether the trade is a winner, I want to sell my shares before the catalyst event, it’s just less risky than holding it into the vote, in my opinion.

Now, remember, the market moves fast and these prices will change. I can’t tell you how to develop your trade plans, it’s on you to decide how you want to trade a specific name.

The key take away here is to identify the catalyst ahead of time, then develop a trade plan, and trade the plan. Of course, it’s not as simple as doing just that, you’ll have to conduct your due diligence.

Now, I’ll be referencing the catalyst runup strategy a lot very soon, so if it doesn’t make sense to you right now… don’t worry, I’ll do my best to teach you more about it in my next issue.

 

Author: Kyle Dennis

Straight outta college Kyle Dennis taught himself to trade, and then made over $7 million in trading profits by the time he was 28 years old. Kyle reveals how to find, track, and profit from lucrative trades for exceptional profits. Thousands of traders follow him every day to learn how to target these high probability trades.