Cult Stocks: Don't Drink The Kool-Aid

By Glenn Curtis | April 26, 2010 AAA

There are certain publicly-traded companies that have developed cult-like followings. As a result their stock prices have soared. But having all eyes on you can be a negative too. With that in mind, today we will take a deeper dive into some very popular names and discuss their chances of seeing further upside to their stocks.

IN PICTURES: 9 Ways To Use A Tax Refund

Is the Apple Rotten or Ripe?
Apple (Nadsaq:AAPL) has very some passionate shareholders. The reason behind that passion is simple. The company has consistently delivered to market a number of high-profile products which have been wildly popular, ranging from the iPod to the iPad, which is known around the world. And going forward there is anticipation that it will continue to surprise Wall Street, and consumers interested in electronics with new and exciting items, well into future periods. Beyond that, the company has been delivering on the earnings front and is coming off a much better-than-expected quarter.

Earlier in the week it released its second-quarter numbers, and in that period it earned an incredible $3.33, way ahead of the $2.45 the sell side had anticipated. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

However, there is a downside to this cult-type stock. The primary concern is that it's very unlikely that the company will be able to beat expectations by such large amounts indefinitely. Sooner or later due to economic or company-specific reasons it will likely fail to please the Street on some level and when it does, the stock could get hammered. The fact that the company trades in the general neighborhood of 20 times this year's estimate provides little comfort.

Those that think that Apple is unsinkable would be wise to consider the once seemingly indestructible JDS Uniphase (Nasdaq:JDSU) or Microsoft (Nasdaq:MSFT). Each of those stocks is well off historic highs and their respective fan clubs seem to have died down quite a bit in recent years.

Search for Another Stock, or a Buy Ticket?
Google (Nasdaq:GOOG) is a company that has developed an amazing reputation. The company is constantly in the news thanks to its incredibly intelligent and well-connected chief executive, Eric Schmidt. Also, it has delivered an amazing string of earnings beats that would make many a public company's mouth water. Its most recently reported earnings beat came earlier this month. Maybe not surprisingly, the stock now trades at more than $544 a share.

But there are concerns, namely its ability to continually surprise the Street on the earnings front. Also, if Yahoo (Nasdaq:YHOO) were to have an amazing resurgence under the leadership of Carol Bartz, some investors could switch camps. While they may at times seem indestructible, don't be fooled.

The Bottom Line
Cult-type stocks are high-flying stocks that do well. But they aren't indestructible and it would be wise for investors to keep that in mind. Under the right circumstances both Apple and Google could be vulnerable and see sizable downside from current levels.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus
Related Analysis
  1. The ADX Shows Strong Uptrends In These 4 Stocks
    Chart Advisor

    The ADX Shows Strong Uptrends In These 4 Stocks

  2. Bull of the Day: Avago (AVGO) - Bull of the Day
    Stock Analysis

    Bull of the Day: Avago (AVGO) - Bull of the Day

  3. Q3 Earnings Scorecard as of October 21, 2014 - Earnings Trends
    Stock Analysis

    Q3 Earnings Scorecard as of October 21, 2014 - Earnings Trends

  4. Downward Trend Channels for the Market Correction
    Chart Advisor

    Downward Trend Channels for the Market Correction

  5. Apple Pay Vs. PayPal And Others: The Race For Mobile Payment Dominance
    Stock Analysis

    Apple Pay Vs. PayPal And Others: The Race For Mobile Payment Dominance

Trading Center