What is a Cult Stock
Cult stock is a classification describing stocks that have a sizable investor following, despite the fact that the underlying company has somewhat insignificant fundamentals.
BREAKING DOWN Cult Stock
Cult stocks promise they will be the next big story after they make a new discovery or get the newest contract from the government. Most do not provide investors with anything other than the story. Furthermore, these stocks typically generate very little, if any, revenue. Typically, investors are initially attracted to the company's potential and accumulate positions in speculation that its potential will be fulfilled, providing the investors with a substantial payout.
For example, many micro-cap biotech stocks are cult stocks. While they promise that they are going to be working on a miracle compound or drug, most of them do not have any source of income as they slowly burn away their initial capital in research and development.
However, some cult stocks do occasionally make good on their stories to become successful. For example, Research in Motion was once a widely followed cult stock that had a great story that attracted many investors, but no revenue. Fortunately, its BlackBerry PDA device became a runaway hit, which elevated the cult stock to its multi-billion-dollar market capitalization status.
Cult Stocks of 2018
The biggest cult stock of 2018 is Tesla, Inc.(TSLA), which gains the lion’s share of cult-status references in the media. Unfortunately, it appears that the shaky reputation of so-called cult stocks is all too true for Tesla, whose CEO Elon Musk is on shaky ground with shareholders.
In June 2018, Nasdaq’s website published a Reuters story with the headline “Tesla shareholders box themselves into corner.” In the article, Antony Currie writes that Tesla shareholders would be voting on a “proposal to split the roles of chairman and chief executive” but that “investors already helped make Tesla a personality-cult stock, so any attack on Musk would come at a high price.” Additionally, the Globe and Mail reported in May 2018 that “cult stock Tesla Inc posted its worst ever quarterly loss.”
Other stocks reported to have cult status in 2018 include:
- Micron (MU), as reported by Jim Cramer at The Street;
- Fitbit (FIT), dubbed by Jonathan Heller at The Street; and
- Daily Journal Corp. (DJCO), deemed so by Brian Langis at Seeking Alpha.
In 2017, stocks like Snapchat (SNAP), Netflix (NFLX), and Shake Shack (SHAK) were named cult stocks. An example of a cult stock of the past is Chipotle Mexican Grill (CMG).