DEFINITION of 'Story Stock'

A stock whose value reflects expected future potential (or favorable press coverage) rather than its assets and income. A story stock trades markedly higher on optimistic expectations about its potential profits down the road. A story stock’s valuations are generally out of line with its fundamentals, since investors are willing to pay a hefty premium for the stock to participate in its future prospects. Most, but not all, story stocks tend to be clustered in dynamic sectors such as technology or biotechnology, since the lure of owning a piece of a company that discovers the cure for cancer or invents a new fuel source is one that few investors can resist.

BREAKING DOWN 'Story Stock'

Story stocks can often be recognized by the substantial amount of media coverage they garner. Because of their near-constant presence in the public eye, a story stock may attract heavy trading volume for many months, until a new contender displaces it in the public imagination. Although a few story stocks go on to achieve great success, most fail to live up to their promise.

The abundance of story stocks depends on prevailing market conditions. Story stocks are commonplace during strong bull markets and flourish during such periods, but are relatively rare when bearish sentiment grips the markets.

The industry sector that generates the most story stocks depends on the investment theme that investors are enamored with at a particular time. During the 1990s, for instance, technology and dot-coms spawned countless story stocks in what was arguably the golden age for them. In the 2003-07 bull market, a period of skyrocketing commodity prices and triple-digit crude oil, most story stocks were either resource-based companies or in the alternative energy space.

While a typical story stock has numerous supporters, its rapid rise and rich valuations also tend to attract short-sellers who are skeptical about the company’s long-term prospects. As a result, a story stock will usually have above-average short interest, which contributes to its significant price volatility.
 

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