Sorting Out Cult Stocks

By Jon Ogg AAA

Cult stocks are perhaps one of the most fascinating of all the stock and bond investing areas. These stocks are pretty low key, but they can trade completely out of reality. In this article, we'll explore these eccentric stocks and show you if they are worth the time needed to invest in them.

A true "cult stock" is not found among the mainstream stocks that everyone knows and loves. These types of stock can often be actively traded in volume, but that heavy trading volume usually occurs on days when there is news or rumors affecting the stock. Then they will occasionally see huge ramps in volume (into the millions of shares in one day) and the trading volume will remain steady in the following days. Otherwise, shares of cult stocks can be quite thinly traded and may only see trading volume averaging in the 50,000 to 150,000. (To read more about news breaks and stocks, see Trading On News Releases.)

Defining a Cult Stock
The prices, earnings, market caps, business segments and other key metrics for cult stocks vary greatly.

These stocks can have the tiniest of micro-cap valuations with a market cap of under $100 million; they can be small-cap stocks with valuations of under $1 billion; and sometimes these can even become mid-cap stocks with values in the $2 billion to $5 billion range. (To read more about market caps, see Market Capitalization Defined and Determining What Market Cap Suits Your Style.)

By definition and characteristics most cult stocks do not become major stocks, but the key word here is "most". There are a few stocks that do make it, and they give hope to investors, who will keep seeking out the next big winner. The company behind the BlackBerry, Research In Motion, was a cult stock. From the mid-1990s up until the late '90s the company had a great story but almost no revenue; and now the world can see the major exponential growth Research-in-Motion has seen since those founding days.

Little-Big Growth
Cult stocks tend to be thought of as infant stocks and often remain dormant a long time. These stocks are followed by traders and investors for years in the hope that a big payday could be coming.

These stocks often tend to be actively discussed in online chat rooms and online message boards. They usually don't have any research coverage from any of the regular Wall Street firms, and many times they don't even have paid-for "analyst coverage". (To keep reading on this subject, see What To Know About Financial Analysts, Forecasts Can Spell Disaster For Some Stocks and Mad Money ... Mad Market?)

Cult stock companies also tend to trade entirely out of whack with reality. This doesn't mean that all of the companies are set to fail, but many just stay in limbo for years and years. Some cult stocks may be tiny little basic manufacturers that are lined up to win a blue-chip company order that will take the company from nascent revenue up to the $100-million mark instantly. These companies literally can have only a handful of full-time employees and can cross a wide variety of industries.

Finally, cult stocks are generally thought of as futuristic or controversial investing subjects. (To learn more about growth and stocks, read Is Growth Always A Good Thing?)

Making a Buzz
Some of the buzzwords that are most frequent around cult stocks are the following: alternative energy, nanotechnology, robotics, artificial intelligence, future warfare, genomics, proteomics, homeland security, extreme entertainment, emerging retail and virtual reality. Not all of those descriptions define a cult stock, but they are a good place to start looking for these exotic stocks.

There are also around 100 or more mining stocks between the U.S. and Canada alone that would classify as cult stocks - exploring areas like uranium, gold, silver, odd "ium-ending" minerals, and much more. These stocks are often very speculative in nature and often have no real production other than the promise of major discoveries. They can often have market caps of $100 million or less, close to zero in revenue and balance sheets that are completely mystifying. (To read more about these industries, see Oil And Gas Industry Primer, Fueling Futures In The Energy Market and Trading Gold And Silver Futures Contracts.)

Biotech zombies, companies that have never produced one selling drug or compound or ones who have failed their only clinical trial(s) and have no prospects, often become cult stocks. At times, some of these will even trade as discounts to their net cash value. It is very rare that these biotech zombies decide to liquidate cash and return it to shareholders. They almost always would have large shareholders that are buried with losses, so the companies stick around in the hope that a major discovery is accidentally made or that they are able to buy into a drug discovery candidate with a university or research institute. This type of cult stock can quite literally jump exponentially on the hint of a partnership. (Keep reading about zombies in Chasing Down Biotech Zombie Stocks and Haunting Wall Street: The Halloween Terminology Of Investing.)

Waiting for the rebound
Often past "fallen angels" become cult stocks. There are many stocks that used to trade with multi-billion market caps and high stock prices back in the tech-bubble days of the late-'90s and early 2000s, but now trade as very low-priced stocks. It is amazing how many of these companies are out there, and they are located globally. These are on all continents and are sometimes ex-S&P 500 companies. When a stock falls 90% and its prospects are down and out, you can be assured that there are many retail investors still holding in hope of a turnaround. Some investors refuse to accept that they will lose money, and they will continue to hold their shares until whatever end will come. That, in and of itself, can create a cult following.

Internet incubator companies that trade as public stocks are usually cult stocks, regardless of market caps. Some of these were huge back in the dotcom bubble and most actually have some viable businesses that keep them legitimate. Again, there are always the defiant investors out there that have held onto a 95% drop and still actively follow the companies with the hope that their Cinderella stock will turn into a billion-dollar operation. These companies come and go, but as long as they have balance sheets that are healthy and have investments outstanding, they will be cult stocks.

Bottom Line: Do Your Homework!
Here is the biggest thing to know about cult stocks: You have to do your homework before playing them, and you have to be skeptical. In general, a stock trading at a low price with a high volume is the best choice for a cult stock. These stocks will be the ones people are talking about with wild and crazy stories, with unbelievable promises and with the hope for exponential growth. Most cult stocks fail to mature into the great stories that were the basis of the hype, but if they don't fail quickly you can probably expect them to hang on for quite a long time.

Some do mature and blossom well beyond the initial hopes. Research in Motion (RIMM), Urban Outfitters (URBN), Guess? (GES), Goldcorp (GG) and Energy Conversion Devices (ENER) were all once cult stocks but made it to much brighter horizons. Cult Stocks are where fortunes are made and lost, and there is no worry that they will go out of fashion any time soon.

Related Articles
  1. First time stock investors may ask, is there any way to buy insurance on stocks to prevent losses?
    Options & Futures

    Stock Safety: Top 3 Ways to Limit Your ...

  2. Investors can use derivative securities to effectively buy insurance on their individual holdings or on their portfolio as a whole.
    Options & Futures

    Can You Buy Stock Insurace? 3 Strategies ...

  3. Options & Futures

    How The Price Of Stock Futures Is Calculated

  4. Futures and derivatives get a bad rap after the 2008 financial crisis, but these instruments are meant to mitigate market risk.
    Options & Futures

    Futures, Derivatives and Liquidity: ...

  5. Options & Futures

    All About Liquid Commodities

Trading Center