Chasing Headlines: How Event-Driven Investing Uncovers Hidden Stock Market Gold

Look, the stock market’s a bit like your unpredictable uncle at Thanksgiving: well-behaved over the long haul, but who knows what he’ll do in the short term? One moment, everyone’s raving, the next, panic sets in, and there’s a stampede for the exit. If only your portfolio came with tranquilizers, right?

Take what happens when a stock gets booted from the S&P 500. You’d think the firm just announced it was switching to dial-up Internet. Shares tumble fast, often too fast, while companies added to the index see their prices pop like a soda can on a summer’s day. Why? It’s not because the actual business suddenly transformed overnight—but because hundreds of index funds automatically rush to buy or sell. Pure, mindless stampede. For those of us who keep our wits about us, these moments create chances to buy formidable companies for a fraction of their worth. Talk about picking up dollar bills when everyone else is staring at the clouds!

And yes, it gets better. Enter corporate spin-offs. When a company spins off a segment, most investors run away faster than from last week’s sushi special. They assume, “If they’re ditching this piece, it must be no good.” But study after study shows spun-off businesses are frequently mispriced, completely ignored by the mainstream, and—here’s the kicker—they often knock it out of the park in terms of performance. Apparently, wallflowers really do have their day.

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A Fresh Perspective on Value

At first blush, this playbook might look like run-of-the-mill value investing—you know, rooting around in the bargain bin while everyone else is jostling at the Apple store. But here’s the plot twist: classic value funds trawl for companies that have been left on “read” by the market for ages. The exciting crowd is event-driven funds, which pounce on stocks shaken up by specific one-off events. Blink and you’ll miss them!

Take the Guggenheim Spin-Off ETF (is that a cool name or what?). This fund doesn’t just sit on the sidelines waiting for obvious deals—it seeks out small- and midsized companies freshly tossed out of their corporate nests. How’s that working? Over the past five years, it’s clocked an average annual return of 11.3%. That’s a solid chunk ahead of peers, year after year. Sometimes, the outcasts really do throw the best parties.

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Finding New Opportunities

Some event-driven funds aren’t content just chasing troubled companies—they thrive on the chaos of big corporate moves. Think mergers. While most folks hear “merger” and think “snooze,” sharp investors see dollar signs in the difference between today’s price and tomorrow’s acquisition payday. Mark McKenna, the brains behind the BlackRock Event Driven Equity fund, says this classic merger-arbitrage hustle typically nets a respectable 5–7%. But with mergers heating up? He reckons 10% could be on the cards. Cha-ching.

Arvind Navaratnam, who manages Fidelity’s Event Driven Opportunities fund, is always prowling for these fleeting chances. Case in point: when Journal Media Group combined forces (merger alert!) with E.W. Scripps and spun off its publishing arm, Arvind saw potential. After Gannett came calling with an acquisition offer last October, Journal’s shares skyrocketed more than 40%. Sometimes it pays to crash the afterparty.

Now, let’s not sugarcoat things. Event-driven investing isn’t all roses. Navaratnam found out the hard way with a heavy bet on Valeant Pharmaceuticals, whose business strategy (buy, buy, buy!) ended with shares dropping more than 80% over the year. Ouch. But hey, his fund still managed to outperform 80% of rivals over the last twelve months. That’s resilience you’ve got to admire.

The Ultimate Diversifier

If all of this isn’t enough to get you checking your watch for the next spin-off or merger announcement, here’s another ace: diversification. Since these funds care more about unique company moves than broad market trends, they zig when the market zags. That means, while everyone else is feeling the heat, event-driven funds keep their cool—and your portfolio could too.

So, whether you see yourself as a deal-hunter or just someone tired of chasing yesterday’s winners, these event-driven strategies might just give you the edge (and the cocktail-party stories) you’ve been looking for.

By the way, columnist John Waggoner knows a thing or two about this racket—he’s penned three books unraveling the mysteries of Wall Street and smart investment strategies. If anyone knows how to spot the market’s best-kept secrets, he’s your guy.