I was standing outside a presentation room at the Money Show in Orlando in early 2020, talking with a couple of investors before starting my talk for the session. They were curious about my methods and I was discussing some of my ideas with them when an elderly lady walked by.

She looked at me, rolled her eyes, and said: “It’s just momentum.”

I smiled at her and nodded. Of course, she was right. I am a momentum investor. But I am also a staunch researcher of company fundamentals and an avid appraiser of management.

In fact, I would say that my approach is a combination of the methods of Warren Buffett and part John Murphy and John Bollinger, two of the most recognized technical analysts of the modern era.

On the one hand, like Warren I obsess over the fundamental aspects of a business before buying a stock. On the other, like the two Johns I pore endlessly over stock charts, looking for key price patterns.

Of course, no investing method is perfect. As a result, the best we can hope for is that we can develop a method that is both reliable and consistent.

And over time I’ve found that by combining the best of both approaches, the fundamentals and the technicals, I am often able to find companies whose stocks deliver explosive returns.

Momentum, Value, and Catalyst Investing

Here is a quick overview of the differences in the two approaches and how combining them can yield gigantic winners:

• Value investors rarely look at price charts while focusing on fundamental factors such as Price/Earnings ratios, earnings, dividends, and return on equity.
• Momentum investors focus on money flows primarily via technical analysis.
• Investors who combine both technicals and fundamentals appreciate value investing tools and apply the tools of momentum investing to optimize the entry and exit points in a stock.

And we at Investing Daily call this the Catalyst Approach, given the fact that a catalyst is a substance that speeds up and optimizes a chemical reaction.

In other words, the combination of both approaches in may ways acts as an accelerant when it comes to stock investing.

Inside a Catalyst Trade

So here are a few pointers which may be helpful when evaluating a trade by the Catalyst method, featuring a stock that I have traded in my personal account over the past 12 months, building materials wholesaler Builders First Choice (NYSE: BLDR).

The Value Summary

• BLDR is in a hot niche at the moment as homebuilders require materials.
• The stock trades at 11 times earnings making it a value stock.
• Year-over-year revenue growth is 128 % while YOY earnings growth is over 300%.
• The stock has beaten earnings expectations for five straight quarters.

The Charting Angle

In June and July 2021, the stock made a double bottom (circled, left) and started a move higher into August, and consolidated in a sideways pattern until late October (circled, right).

The late October period is the Catalyst period, the period in which buyers and seller opinions are coalescing and the stock is nearing a decision point to break out to the upside or to move decidedly lower.

As you can see, the stock broke out to the upside and has moved decidedly higher in what most investors would consider a huge momentum run. But a Catalyst investor realizes that the breakout in October started back in June. And here is why:

• The Accumulation Distribution indicator (ADI) was moving decidedly lower over this period. This is a sign that short sellers are betting on the stock’s price falling.
• At the same time, the On Balance Volume Indicator (OBV) was moving steadily higher.
• Finally, the Volume by Price indicator (VBP), the big bars on the left side of the chart, grew smaller as the stock reached the $55 area. This is a sign that price resistance – essentially the short sellers – were starting to get tired

Now, here is the key. Even though ADI kept trending down, OBV kept rising. So even though there were still short sellers involved, the buyers were not deterred, and the shorts continued to weaken. As a result, when the shorts finally gave up as they did in October when ADI flattened out, the buyers overwhelmed them and the stock took off.

Finally, note that ADI is now rising along with OBV. That’s a sign that new buyers are coming in as the last group of short sellers is finally capitulating.

Putting it All Together

By looking at price charts on a regular basis I keep tabs on the current price action of a stock. Simultaneously by knowing a company’s business and fundamentals, especially management’s ability to deliver, I am always able to appreciate what the price chart is telling me.

In other words, when I see an attractive price chart, I plug in what I know about the company, the current business climate, and by combining these two sources of information I can easily decide whether the time for owning a stock is optimal.

I wish I had taken down that elderly lady’s name and contact information, because she was indeed a wise woman.

As of this writing, I am still actively trading BLDR in my personal account.

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