There was a time when catalysts were very important in investing. In finance, a catalyst is a factor that accelerates the rise in a stock’s price. Sometimes the catalyst is a change in management — this occurred at CSX when new managers, skilled in making railroads more efficient, were hired. Sometimes it’s a new concept, such as using the Apple Watch as a medical diagnostic tool. Other times, it’s an entire industry—such as when an infrastructure bill is proposed in Congress. United Rentals is an exa…

It takes time to research individual companies looking for catalysts. As commissions declined, there was less money available for research. Modern Portfolio Theory argues that this time is wasted — everything about a company is already priced into its stock. Based on that belief, they conclude that the best investments are index funds.

We disagree. We built our strategy using a different kind of catalyst as a starting point: share buybacks. With artificial intelligence, we can review potential share buybacks across all 20,000-plus publicly traded U.S. securities. We then screen these securities for Safety, Quality, Value, and Growth.

This brings us back to catalysts. Negative catalysts — for example, tobacco companies — are used to screen out undesirable investments. Positive catalysts strengthen the case for companies already engaging in share buybacks.

Some examples of good catalysts:

• Apple – Medical watches
• AutoZone – Owns its own locations; no rent increases
• CSX – Monopoly
• eBay – Divesting non-core businesses
• Dave & Buster’s – Unique facilities
• Kohl’s – Amazon partnership; excess space
• United Rentals – Potential infrastructure policy boost
• UAL – Monopoly
• WCC – Supplier to electric vehicles and the Internet of Things
• LyondellBasell – Moving chemical plants from Europe to the low-cost Gulf Coast
• Home Depot – Home shortages

We wish you a wonderful holiday season and a happy New Year.

Katz Family Financial