It’s hard to find value these days, so it pays to look for catalyst-driven value stocks. Here are three that I like.
With the stock market reaching record highs, it is becoming increasingly difficult to find attractive stocks that aren’t fully pricing in a prosperous post-pandemic future. And, for the few stocks that haven’t participated, their underlying company fundamentals may appear to be permanently weakened. Most investors prefer to avoid these out-of-favor companies.
Yet, that is where some of the best opportunities can be found. Many of the most successful investors are contrarians who buy unpopular stocks at bargain prices. Not only do these stocks offer the potential for strong returns regardless of the market’s direction, their low valuations can dampen the effect of sharp declines in mega-cap popular stocks.
However, buying just any unpopular stock isn’t a great strategy. Many of these stocks are out of favor for a reason – they have fundamental problems that, if left unaddressed, could threaten the company’s existence or at least relegate it to permanent cheap-stock status. Low valuation isn’t enough, especially in a rapidly-evolving economy with aggressive competitors.
You need to find catalyst-driven value stocks.
How Catalysts Can Jump-Start Your Stock Performance
Successful contrarian investors look for a catalyst to jump-start the fundamentals at otherwise moribund or underperforming companies. A catalyst is a strategic-level change such as new leadership, a spin-off transaction, interest from an activist investor, or emergence from bankruptcy. An effective catalyst can jump-start a struggling company toward a more prosperous future.
Our Cabot Turnaround Letter investing process emphasizes catalyst-driven value stocks. To help us find these ideas and to organize our analysis, we maintain a catalyst database, currently holding over 3,000 strategic events from the past three years. We publish a listing of the most recent catalysts each month in our Catalyst Report, a proprietary report that is unique on Wall Street.
One highly effective way to use this tool is to pair the catalyst names with weak stocks. Combining these two traits can generate a short list of high-potential turnaround investment candidates. As part of the report, we highlight some of the most interesting candidates.
This past March saw many CEO changes and a ramp-up in activist investor campaigns as the proxy season approaches. While it was a relatively quiet month for spin-offs, we anticipate this type of catalyst will remain a prolific tool for finding attractive contrarian investments. With the worst of the pandemic (hopefully) in the rear-view mirror, companies and shareholders are working to adjust to the new economic and capital markets environment. This will make 2021 a busy year for catalysts.
3 Catalyst-Driven Value Stocks
Three catalyst-driven value stocks that we recently highlighted for subscribers include:
Blucora (BCOR) – Blucora is an $800 million market cap company with two businesses – Avantax (wealth management) and TaxAct (tax preparation software). An activist investor, Ancora, is pressuring for the removal of the CEO, a refresh of the board of directors and a break-up of the company. Ancora published a 73-page slide deck that outlines their rationale and plans.
FirstEnergy (FE) – This otherwise dull electric utility got caught up in an embarrassing bribery scandal last year. While the outcome remains unclear, the ever-present Carl Icahn sent a letter to the board of directors and is acquiring shares as they remain heavily discounted.
Berkshire Hills Bancorp (BHLB) – Previously self-described as “America’s Most Exciting Bank,” Berkshire predictably collapsed under its controversial leadership and strategy. Now under new leadership and pressured by an activist investor, the bank appears to be getting its act somewhat together. The shares have responded but this one still is worth a closer look.