The market is currently a game of musical chairs. You must stay active to find winning trades even as you prepare for the possibility that the music may stop, taking all stocks on a downward path. That's why it's sensible to focus on stocks with near-term catalysts. They may deliver quick gains, which enables you to book profits and move to cash while you wait out any coming pullback.
But if these catalysts fail to materialize, then shares could fall considerably. That's why it's important to stay abreast of events, as they move quickly. I recommend a stop-loss for these kinds of stocks as insurance if the catalysts don't happen.
1. Diamond Foods (Nasdaq: DMND)
I profiled this company back in early July and though shares have risen more than 10% since then (including a 15% gain since Aug. 14), considerably more upside may soon be had. That's because Diamond's auditors appear to be finalizing their review of the company's books (which only involved the needed restatement related to prices paid to walnut growers in 2010 and 2011).
Diamond has no control over the timing of the audit's completion, but upon completion, look for a quick re-filing of recent financials and the opportunity for analysts to re-assess their valuation. Note that shares have tumbled more than 76% during the past 12 months.
"Diamond is a growth stock, and we have every reason to believe it goes back to being perceived as such," predict analysts at D.A. Davidson. With a positive outlook, they anticipate more than 100% upside from current levels once problems are resolved.
2. Kit Digital (Nasdaq: KITD)
After deep struggles, this stock has announced plans to seek a buyer. This provider of video and content delivery systems has managed to acquire several niche players before its stock imploded. Some suggest those assets could be sold off piecemeal to help regain financial stability. The entire board has been turned over, and the current one has the mandate to do whatever it takes to unlock shareholder value.
3. Monster Worldwide (NYSE: MWW)
Like Kit Digital, Monster has also been looking for a buyer. For its part, the company has stumbled from its perch as one of the leading employment websites. But it still has considerable cash flow, so it's likely a perfect target for private equity firms that can fix the broken business and bring it public again down the road. Both are high-risk, high-reward set-ups.
4. Citigroup (NYSE: C)
If you're a subscriber to my $100,000 Real-Money Portfolio, then you know I'm a fan of this banking giant. Recall that Citigroup failed a stress test with regulators this past spring that would have paved the way for stock buybacks and a major dividend hike.
At the time, management effectively said "we'll be back" to the regulators. And they've spent the rest of the summer letting continued solid cash flow fatten up the balance sheet. A few recent asset sales also strengthened Citigroup's finances. As an example, Citigroup had a capital ratio (known as Basel III) of 7.2 in the first quarter, though that figure jumped to 7.9 in the second quarter, and likely now exceeds 8.0.
When will Citigroup sit down with regulators again? The bank is hinting as soon as January. But this is a catalyst that more will anticipate, so shares are likely to strengthen throughout coming months. That may partially explain why shares have rallied nearly 20% during the past month.
Risks to Consider: These stocks are in the doghouse for good reason. If they fail to deliver these catalysts, they could stay there.
Action to Take -->These are opportunities that deserve further research, and you should only own them once you are satisfied with your own due diligence.
-- David Sterman
David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.
This article originally appeared on StreetAuthority
Author: David Sterman