Incorporating Catalysts into your Investment Process

Jonathan Boyar, director of Boyar Value Group and advisor to the MAPFRE AM US Forgotten Value Fund

Growing up, my father, Mark, began teaching me about the stock market, and thankfully the lessons have never stopped. Some parents read their kids fairy tales or sports biographies, but my dad read me the Wall Street Journal and company annual reports.

We still played catch and did the other things my friends did with their parents, but my dad also taught me many lessons about investing that have stayed with me through the years. One lesson in particular on the importance of catalysts has stuck with me. He continues to remind me, like he does our investment team, that before investing in a stock, you should have a catalyst:

“You can find the greatest company in the world,” he’d say, “and it can be selling at a cheap price. But if it doesn’t appreciate in value, it does you no good.”

Are catalysts really such a big deal?

Investors know the frustration of value traps—when a seemingly undervalued stock remains stagnant (or dips even lower). They expose you to both opportunity costs and the risk of actual equity loss. Catalysts can help you avoid these traps, which is why you need to be looking for them. We don’t just buy a stock because it’s cheaper than it should be—we need something in the equation that will eventually attract other investors to the discount. Something that draws their attention (and investment dollars), pushing the stock price up. We either need that catalyst, or we need to discern some avenue that will make the company an attractive target for an acquisition (at a substantial premium, of course!) by a private equity investor or a company in a similar industry.

Barron’s once called Mark Boyar “the world’s most patient investor,” and his focus on catalysts is precisely why: At Boyar Research, our patience is deliberate, when we wait, we’re waiting (not hoping) for something in particular. Investors often think of catalysts in terms of the next few months, but unlike Wall Street, we don’t insist on instant gratification. Although we like our money-making catalysts to occur sooner rather than later, we’re happy to take the long view: if we see a path for the stock to increase substantially in value, we’ll wait years—our patience is simply part of the investment process.

But what types of catalysts do we look for? Here are some things that catch our eye:

• Does a company have an unrelated division that Wall Street isn’t valuing correctly or that is masking the company’s overall profitability? We look for potential spinoffs or asset sales that would highlight the true underlying value of the company.
• Is a high-quality company underperforming due to poor management? If there is no controlling shareholder, we look for the potential that an activist investor could swoop in and agitate for change or the sale of the company.
• Does the company have a cash-rich balance sheet but does not pay a dividend or hasn’t been repurchasing its shares? We look for signs that management might consider initiating a dividend or stock buyback (if the stock is inexpensive).
• Has leverage increased temporarily (due to a recent acquisition that also happened to have made shares inexpensive), but we believe the acquisition to be part of a sound strategy and the company has a clear path to reduce leverage back to historical levels over a reasonable amount of time.
• Is the company controlled by an octogenarian, with no heir apparent? Sooner or later either the controlling shareholder or his descendants may sell the business.

Our commitment to catalyst-driven investing is epitomized in our annual Forgotten Forty report. Initiated in the 1990s, every December, we provide a report with insights on 40 companies we believe are poised for outperformance in the upcoming year, propelled by unfolding catalysts.

Here are some of the companies we profiled in last year’s edition, with their corresponding catalyst:

1. Allison Transmission Holdings, Inc.
   (ALSN)
   Performance: +40%
   from Dec 15, 2022
   Catalyst: Continued capital return, with a 50% reduction in shares since 2014 and double-digit-percentage dividend raises over the past 3 years.
2. Booking Holdings
   (BKNG)
   Performance: +59%
   from Dec 15, 2022
   Catalyst: Robust results despite macro headwinds/uncertainty, aided by the ongoing recovery in global travel.
3. Comcast Corporation
   (CMCSA)
   Performance: +29%
   from Dec 15, 2022
   Catalyst: Potential for outsized share buybacks with the monetization of Hulu.
4. The Goodyear Tire & Rubber Company
   (GT)
   Performance: +17%
   from Dec 15, 2022
   Catalyst: Early entry into the dedicated EV tire market, gaining OEM acceptance.
5. Liberty Braves Group
   (BATRK)
   Performance: +10%
   from Dec 15, 2022
   Catalyst: Liberty Media’s split-off of the Braves as a standalone public company, potentially paving the way for sale of the team.
6. News Corporation
   (NWS/A)
   Performance: +13%
   from Dec 15, 2022
   Catalyst: Numerous opportunities to unlock value, including sales and spinoffs (e.g., Digital Real Estate Services, Dow Jones, Foxtel).
7. Uber Technologies
   (UBER)
   Performance: +77%
   from Dec 15, 2022
   Catalyst: Strong profitability from ongoing Mobility recovery/expansion, with EBITDA ramping more quickly than the investment community expected.

Why these businesses? Cheap stocks are a dime a dozen, and many even have good, solid fundamentals—but we don’t stop there. Undervalued stocks can stay undervalued for far too long, and we have better uses for investment dollars than keeping them languishing in a good stock for bad reasons. So when we find a solid but undervalued company, we keep right on digging, looking for a catalyst that can turn fifty cents into a dollar within a reasonable timeframe.

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