Watchlist Strategy & Examples
Best practices for better investing.
My own watch list is a combination of early-stage companies I hope have potential to develop, market leaders I want to buy at a lower price, and special situations that I want to monitor.
Using a combination of market and news updates about these companies, I set a series of metrics to trigger ‘alerts’ when a certain event occurs. Sometimes, these are based on price action, sometimes fundamental performance, and other times they are triggered by RNS updates and events.
Over many years, the watch list has progressed from a small handful of businesses to over 60 names split across three ‘camps’.
Early-stage Equities are businesses that are low revenue, small/micro-cap, and/or pre-profit, but which present an interesting ‘story’ which I wish to monitor. I usually find these opportunities through networking events and am impressed by the potential but am uncomfortable taking a risk on such an unproven name. Such businesses can include early-stage mining companies, bio-tech firms, technology companies and smaller companies with potential for growth.
In addition, I also group ‘pre-profit’ businesses into this camp – companies such as Ocado and Palantir, which have significant revenues but no profit.
My usual approach with these businesses is to add them to my watch list with an ‘alert’ if the company hits certain revenue or EPS targets, and to monitor their RNS updates for positive developments.
The decision to add these companies to my portfolio is much closer to the ‘art’ side of investing than the ‘science’ side. Examples include:
Special Situations are companies that are facing unusual disruption. These are the rarest businesses on my watch list and are based on event-driven trading and arbitrage opportunities.
These events are difficult to identify and utilise disparities in price occurring from mergers, tender offers, spin-offs, liquidations, and rights offerings. These differences occur as a result of market uncertainty about outcomes.
For example, if a company makes a tender offer for a business, the deal is subject to various hurdles such as board, shareholder and regulatory approval. Until cash changes hands the deal is not ‘done’, and so market usually price in a discount that reduces until a deal is concluded. This discount can widen or fall depending on how the market perceives that the deal is progressing.
An investor can benefit from this uncertainty by buying at a discount and waiting for the deal with conclude, at which point the discount closes to zero, generating a profit. If the deal fails to conclude or the terms are changed, the investor will be left ‘holding the bag’ with a potentially distressed or overvalued asset.
A good example of a deal with significant uncertainty was the 2023 deal between Activision and Microsoft, which was originally account in January 2022 when Microsoft announced their intention to acquire Activision for $68bn in cash. The deal came under significant regulatory scrutiny and faced heavy opposition from Sony Entertainment, a competitor to Activision and Microsoft’s gaming interests.
The share price traded at up to a 20% discount to the deal strike price (the price at which Activision would be acquired by Microsoft), enabling patient investors to purchase shares and wait for the deal to close.
The Latest from The Blog
“In the short-term the stock market is a voting machine but in the long-term it
A few weeks ago, I was speaking to a newer investor who had listened to
Having started investing over ten years ago, I can now say with reasonable confidence that