What Is a Story Stock?

A story stock refers to a company's shares whose value reflects expected outperformance, the culmination of some new innovation, or favorable press coverage, rather than its market value being solely based on fundamentals like assets and income. A story stock's share price is thus often bid up on overly optimistic expectations about its potential profits. Its valuations are generally out of line with its fundamentals, since investors will pay a premium for the shares to participate in its growth prospects.

Many story stocks are in the dynamic technology or biotechnology sectors due to the lure of purchasing shares of an innovative company that may discover the cure for cancer or invent a new fuel source.

Key Takeaways

  • Story stocks have prices that greatly influenced by investor sentiment related to future developments, anticipated outperformance, or positive headlines.
  • Story stocks' market valuation often exceeds their fundamental value, although share prices may continue to remain bid up nevertheless.
  • Examples can typically be found in the technology, biotech, and pharmaceuticals sectors where there is a great deal of hope that some innovation will manifest.

Understanding Story Stocks

Story stocks often garner substantial media coverage. Because of the abundant attention, a story stock may attract heavy trading volume for many months, until a new contender displaces it. A few story stocks may achieve great success, but most fail to achieve their promise.

The abundance of story stocks depends on market conditions. Story stocks are commonplace and flourish during bull markets, but are relatively rare in bear markets. The industry sector that generates the most story stocks at a particular time depends on the dominant investment theme such as tech or energy. 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. Therefore, a story stock will typically attract above-average short interest, which can lead to significant price volatility.

The FAANG Story

In 2013, CNBC's Jim Cramer coined the term FANG to refer to four dominant technology stocks as measured by market performance and capitalization: Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google's parent company Alphabet Inc. (GOOG). Apple (AAPL) was added later on in the year to make it FAANG. These story stocks were strong performers from 2013 on, and in 2017, the five stocks' average performance was about 50%, compared with a 19% gain for the S&P 500 Index (SPX).

The valuation and spectacular performance of the FAANGs have been likened to that of the tech stocks before the 2000 dot com burst, which led many overvalued tech companies to crash and roiled global markets. However, some analysts have noted that there is a difference between both tech classes, stating that there is plenty room for the current tech class to grow as areas of cloud computing, social media, e-commerce, artificial intelligence (AI), machine learning and big data are still being explored and developed.