What Is a Cult Stock?
A cult stock describes a stock that has a sizable investor following despite the company lacking when it comes to its underlying fundamentals. Cult stocks promise that they will be the next big company after they make a new discovery or get a large contract. They have an intense fanbase that is excited by the uniqueness of the company and its product and the belief in its long-term success.
However, most, but not all, cult stocks do not provide investors with anything other than a story, typically generating very little, if any, revenue or profits.
- Cult stocks are stocks that have an intense following by investors but whose financial fundamentals don't support their sizable base.
- Investors are attracted to cult stocks due to the potential of their market and product.
- Cult stocks can also be characterized by the strong personalities leading them, such as Tesla (TSLA) CEO and founder Elon Musk and Apple founder Steve Jobs.
- Financial analysts recommend not to invest in cult stocks unless the facts and figures indicate them to be a solid investment rather than just hype and popularity.
Understanding a Cult Stock
Investors are initially attracted to a cult stock's potential, accumulating a position in hopes that its potential will be fulfilled and will provide investors with a substantial payout.
Cult stocks are also characterized by strong personalities that run the company. Such personalities see markets where none exist and are generally able to convince skeptical investors to part with their money for their vision.
An example of such a personality is Apple (AAPL) founder Steve Jobs. It was said that Jobs was so infectious that he created a reality distortion field (RDF) around him. An RDF relates to how people around someone sees them. It is this type of personality and their die-hard belief in their own product and company that can lead to the rise of a cult stock.
Cult Stock Success
Apple at one time was a cult stock, before its heyday as one of the most popular and successful companies in the world. It had an intense group of followers that loved its computers and software and investors that believed in its success, despite its shaky history, small market share, and less than stellar fundamentals.
Of course, everyone knows the history of Apple's turnaround with the release of its iPod, followed by the iPhone and then the iPad. Cult stocks can become great investments, but the story of Apple is a rare one.
Apple would not have broken out like it had if it wasn't for the unique vision of Jobs who pivoted the company away from its original product offering to create products that for the most part did not exist. Consumers weren't all of a sudden going to start buying Apple computers en masse when PCs and Microsoft had a stranglehold on the market.
It is this reason that analysts stress not to invest in cult stocks because of their popularity or hype, but to truly understand their value as a company to determine whether the facts and figures hold up and if the tides of the market are changing, such as the story with Blockbuster and Netflix.
Examples of Cult Stocks
The biggest cult stock in recent times has been electric car manufacturer Tesla (TSLA). It's a well-talked about and well-covered stock by the media. However, it has a shaky reputation when it comes to generating steady revenues and cash flows. Still, investors have been adamant in their support of the company and its stock price has benefited. Analysts and observers attribute the cult-like support to investor fascination with the company's founder and CEO Elon Musk.
Many micro-cap biotech stocks are cult stocks. While they claim to be working on a miracle compound or drug, most of them do not have any source of income as they slowly burn initial capital on research and development (R&D).
Other stocks that have had cult status include the likes of Micron (MU) and Fitbit (FIT). Several years ago the likes of Snapchat (SNAP), Netflix (NFLX), and Shake Shack (SHAK) were also considered cult stocks.