What Is a Cult Stock?
A cult stock describes a stock that has a sizable investor following despite the underlying company lacking when it comes to underlying fundamentals. Cult stocks promise they will be the next big story after they make a new discovery or get a large contract. However, most cult stocks do not provide investors with anything other than the story, typically generating very little, if any, revenue.
- Cult stocks are stocks that do not have fundamentals to justify their sizeable investor following.
- Investors are attracted to cult stocks due to the potential of their market and product.
- Cult stocks can also be characterized by strong personalities leading them, such as Tesla (TSLA) CEO and founder Elon Musk.
Understanding Cult Stocks
Investors are initially attracted to a cult stock's potential, accumulating a position in hopes that its potential will be fulfilled and 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. With Jobs, the term RDF was first used by Bud Tribble in the early 1980s at Apple Computer to describe the effect he had on computer developers working on Macintosh.
RDF has been extended to other managers and leaders who try to convince their employees to become passionately committed to projects without regard to their overall difficulty or competition. It is sometimes used with regard to excessively-hyped products that are not necessarily connected with any one person.
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).
However, some cult stocks do occasionally make good on their stories to become successful. For example, Research in Motion, now known as BlackBerry Limited, was once a widely followed cult stock that had a great story that attracted many investors, despite trouble generating income. Fortunately, its BlackBerry PDA device became a runaway hit, which elevated the cult stock to a multi-billion-dollar market capitalization.
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. Analysts and observers attribute the cult-like support to investor fascination with the company's founder and CEO Elon Musk.
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.