What Are Wall Street's 'Cult' Stocks?

The large majority of society would never want to join a cult. Yet, many investors buy shares of stocks that are considered to be “cult” stocks.

A cult stock is typically a stock that has a market valuation supported mostly by the story of what the company “could be” rather than what fundamental valuation metrics suggest it currently is.

Most cult stocks are companies that offer the possibility of extremely large long-term growth and huge earnings down the line if investors will simply believe in the story.

That’s not to say that these companies have nefarious intentions or are bad companies. CNBC analyst Jim Cramer has repeatedly called successful companies Tesla Motors Inc TSLA, Amazon.com, Inc. AMZN and Netflix, Inc. NFLX cult stocks.

“When stocks fly into orbit, breaking free from all traditional valuation restraints, I have a hard time telling you to buy them,” Cramer said of cult stocks last year.

“That’s because with the underpinnings of fundamental analysis, I run the risk of making a mistake that could really hurt any potential buyers.”

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Last November, Cramer declared GoPro Inc GPRO, Fitbit Inc FIT and Shake Shack Inc SHAK cult stocks. All three stocks are down between 34 and 65 percent since that time.

Often, popular IPOs quickly become cult stocks because they capture the imagination of investors. Two of 2016’s most popular tech IPOs, Nutanix Inc NTNX and Twilio Inc TWLO, are examples of stocks that could be gaining cult status. Nutanix shares have more than doubled since its IPO, and Twilio’s stock has tripled.

Last year’s largest tech IPO, Atlassian Corporation PLC TEAM currently trades at a forward PE of 63.4 and a P/FCF of 64.8.

It can be hard to keep from buying a stock with so much excitement surrounding it. But investors have to remind themselves that the realities of earnings reports and balance sheets tend to trump a good story in the long-run.

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