The secret to making money in the stock market is NOT to simply invest in great companies, but to identify great investments. That may come as a surprise, but it’s true.
There are thousands of great companies in the world. Many have cutting-edge products, earnings growth, top-notch customer service and very talented managers. But not all of these “great” companies deliver big returns to shareholders.
For example, both Exxon Mobil (NYSE:XOM) and Wal-Mart (NYSE:WMT) are dominant in their industries. But over the past five years, these two “best-of-breed” stocks are up just 44% and 62%, respectively.
That’s not great performance, especially considering the S&P 500 is up 97% over the same time period.
So what gives? How do you generate wealth in the stock market if “great” companies – like Exxon and Wal-Mart – don’t always deliver above-average returns?
How to Identify Great Investments
The secret is to recognize the difference between great companies and great investments. Great investments go up in value. And almost all great investments share one thing in common: positive catalysts.
A stock catalyst is an event that has a very dramatic impact on the company’s future. A catalyst can completely change a company’s growth profile and cause a rush of investors into the stock, driving the share price higher by 100% or more over a relatively short period of time.
Sometimes it takes six to 18 months. Sometimes it happens overnight. But the bottom line is that behind almost every single stock outperforming the market there is at least one positive catalyst.
That’s the difference. It doesn’t matter of the company is great, awful or somewhere in between (truth be told, most companies are just mediocre). What matters most is that there are positive events driving shares higher.
Susser Holdings (NYSE:SUSS) is just one example of a great company that has also been a great investment. The company owns a chain of convenience stores and gas stations based in the booming state of Texas.
In 2012 I caught wind of Susser’s growth story and featured it in an issue of 100% Letter. Susser’s growth catalysts included 20 to 30 new stores each year and a new large-store format that included Mexican-style quick-serve restaurants.
The simple business model – gas brings customers in the door and restaurant quality food, quick snacks and drinks generates steady sales – was a hit. Subscribers have made over 140% in Susser Holdings in 18 months, and I expect shares to continue to rise.
I always stress that one key to a catalyst-based investment strategy is to make sure the events are significant, positive and have a measurable impact on the company in terms of important metrics – such as sales, earnings, product distribution and market share.
You’re also likely to have more success if you focus on a few types of catalysts to begin with. Over time, broaden your criteria.
In my 100% Letter advisory service I look for a wide variety of stock-moving catalysts, from oil drilling results to new drug approvals. I also keep an eye out for blockbuster product introductions and even corporate turnaround stories.
Best Buy (NYSE:BBY) is a great example of a turnaround story subscribers are invested in right now. The retailer is showing that brick-and-mortar can compete with online behemoths like Amazon (NYSE:AMZN). And the stock is rallying … we’re already up 55% in just over four months.
These are just a few examples of common catalysts. There are dozens more, and with a little practice I’m confident you can put the strategy to work and create a winning track record and solid portfolio performance.
Remember to focus on catalysts that have a significant, positive impact on sales and earnings.
If you can’t link the catalyst to these types of metrics, they are likely just normal events, and are too small to justify an investment in the company.