One of the first things you do when seeking out investments is to look for "undervalued stocks."
But that's only the first part.
You then want to narrow down your list of undervalued stocks by picking out the ones with "ignition points" or catalysts behind them.
The more catalysts you see, the more likely it is that your stock will surge.
About two years ago, I wrote about a tech stock that had three strong catalysts driving it forward. Since we're in the "homestretch" toward the Belmont Stakes, let's call it a "Triple Crown" of catalysts.
I predicted the combination of those ignition points would push the stock higher – and that the stock would beat the overall market by a wide margin. And the company has since performed pretty much as I predicted.
Since March 14, 2014, the S&P 500 is up 11.3%. And our stock has gained 19.6%, meaning it's beating the broader market by close to double.
You might think that's a pretty good run for a big-cap company like the one I'm talking about. And it is…
However, I've just identified a fourth catalyst and a "kicker" that make me even more upbeat about this tech industrial leader.
And that tells me it's not too late to place your bet on this "horse" if you haven't been riding it since my first recommendation.
The $1.3 billion company, which will be called AdvanSix, will be based on Honeywell's resins and chemicals business, and headed up by that division's current leader, Erin Kane. The deal – scheduled to be finished by early next year – will be a tax-free spin-off for shareholders.
That means, if you're a current Honeywell shareholder or buy in soon, you'll get shares in a whole new company – for nothing – early in 2017.
Now, the materials business may seem unexciting – especially compared to the high-tech systems for home and defense that Honeywell is best known for.
The New Jersey-based conglomerate develops and produces automation technology for offices, homes, and industrial centers that can be remotely controlled with mobile devices. The tech company also makes turbochargers that work with gas, diesel, and hybrid-engine systems – and clean-tech products, specialty fibers, and advanced-wireless sensors.
You see, this spin-off deal is occurring as we continue to see big breakthroughs in Miracle Materials.
Miracle Materials are where profit opportunity and science intersect. This is an innovation sector I've watched closely since the late 1980s, when I was writing about the Reagan-era defense buildup.
Back then, scientists had begun experimenting with different types of compounds and materials with the hope of giving our troops an edge on the battlefield. These experiments invented all sorts of cool things, but they were often classified as "secret," meaning they were very expensive and had few commercially viable applications.
Science of that time was simply far ahead of business opportunity.
Things have certainly changed. Those "top secrets" are now big profit opportunities.
These Miracle Materials – everything from rare earths that drive precision lasers to the cobalt needed for rechargeable batteries – are touching every aspect of the economy. We use them in smartphones, semiconductors, consumer electrics, satellites, and even medical devices.
In fact, Miracle Materials are headed quickly toward a $1 trillion market opportunity threshold.
Graphene, the carbon-based creation that is incredibly strong and the thinnest man-made material on Earth, is the public face of this "Golden Age of Materials Science."
But there are many more out there.
For instance, it was announced just last week that a team of scientists at the University of Maryland found a way to make "transparent wood." They did so by removing a molecule called lignin, which gives wood its natural color.
This new Miracle Material is stronger and more insulating than glass – and it diffuses light better, making it a topnotch window. For now, scientists can only create small pieces of transparent wood at once – but that's a scaling issue they or other researchers should be able to overcome pretty quickly.
Beyond its traditional ammonium-sulfate fertilizers and chemicals such as phenol and acetone, AdvanSix will also be home to its own in-house Miracle Material – Nylon 6.
That's a polymer resin used to produce engineered plastics, fibers, filaments, and films. Those products are used to produce carpets, sports apparel, fishing nets, packaging – and automotive and electronic components.
And that puts AdvanSix deep into the "convergence economy" – where such innovations as sensors, software, mobile communications, Big Data, next-generation microprocessors, high-speed networks, ultra-high-definition displays… and Miracle Materials… are meshing to create wholly new businesses.
In the auto sector especially, I expect AdvanSix to get some juice from the "connected car" market.
That said, the Miracle Materials science behind the AdvanSix spin-off is just a "cherry on top" of this latest catalyst for Honeywell.
Let's now talk about how this spin-off is a true fourth ignition point.
Spin-off stocks are like "found money" for investors, especially when they're tax-free like the AdvanSix one is.
Studies show that the shares of these newly independent firms tend to trounce the overall market. A Lehman Bros. study found that spin-off companies beat the market by 40% in the first two years, while a Penn State University study found a three-year return of 76% – enough to beat the market by 31%.
And they often end up as big-premium takeover plays.
Meanwhile, there's the Honeywell strategic growth plan, which I told you about back in 2014, that creates the company's original "Triple Crown" of catalysts that continue to push HON stock much higher…
- Mergers and acquisitions (M&A): Honeywell plans to spend as much as $10 billion between 2013 and 2018 to buy companies that fit its focus. That's more than twice the $4 billion Honeywell spent on M&A in the previous five years. With that dynamic in place, the stock advanced 250% and outpaced the overall market by nearly 67%.
- Earning increases: Honeywell is committed to increasing both sales and earnings. It's projecting organic sales growth of $7 billion to $12 billion over 2013 levels – enough to get the company to a range of $46 billion to $51 billion by 2018. And the expected mergers could add an additional $5 billion to $8 billion in revenue. So we're looking at a potential revenue increase of more than 50% from Honeywell's 2013 sales of about $39 billion.
- Shareholder focus: Honeywell is spending $5 billion to buy back its own shares. Over time, that will drive up its earnings-per-share (EPS) number, which in turn will induce investors to value the stock more highly. This willingness to pay more for the shares will drive up the stock price, drawing in even more investors. Moreover, the company is committed to maintaining a "competitive dividend."
Any one of these catalysts is enough to get a stock like Honeywell moving.
But when you have that original Triple Crown – and now a fourth ignition point, in the AdvanSix spin-off – well, that's the kind of "breeding" that can produce a race-winning thoroughbred… and huge gains for investors.
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About the Author
Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.