ARE CULT STOCKS WORTH INVESTING?
Cult stocks are said to be one of the most unusual investment instruments. Although a cult stock is not noticed in the mainstream, is it worth the investment?
There are at least two types of cult stocks: The first one are actively traded in volume, but it occurs on days when news or rumors surround the stock. Investors will occasionally notice huge ramps in volume and trading volume will remain stable in the following days. The other can be quite thinly traded and its trading volume may range between 50,000 and 100,000.
Cult stocks differ depending on various key metrics, including price, earnings, market capitalization, and business segments. Most cult stocks do not become key market players. But very few do make it, giving hope to investors still looking for the next big thing. One notable cult stock is Research in Motion’s BlackBerry that had a great story but nearly no revenue from mid-1990s up until the late ‘90s.
Cult stocks are considered infant stocks and frequently remain dormant in the long time. Some traders and investors follow these stocks for several years, hoping to score a big payday. Oftentimes, these stocks are often talked about in online chat rooms and forums. But these stocks are not backed by a research coverage from any of the regular Wall Street firms, and have no analyst coverage.
These stocks can also trade entirely out of reality. It does not mean all of the firms are bound to fail, but many remain in limbo for years. Certain cult stocks can be little basic manufacturers slate to secure a blue-chip company order that will take the firm from budding revenue up to the $100-million record in a jest.
Alternative energy. Artificial intelligence. Emerging retail. Extreme entertainment. Genomics. Homeland security. Nanotechnology. Robotics. Virtual reality. These are some of the common buzzwords describing cult stocks. However, not all of these words define a cult stock.
Approximately 100 or more mining stocks in the United States and Canada alone are classified as cult stocks, including gold, silver, and uranium. Often speculative in nature, these minerals have no real production other than major discoveries, and more or less $100 milion market caps. Aside from that, they have close to zero in revenue and balance sheets.
Biotech zombies, which have never created one selling drug or compound, or once failed their only clinical trial(s) and have no prospects, are also categorized as cult stocks. There are times some of these stocks trade as discounts to their net cash value. It is very rare these companies decide to liquidate cash and give it back to shareholders. They nearly always would have large shareholders carrying losses. Therefore, firms stick around, hoping a major discovery is accidentally made or they can buy into a drug discovery candidate with a research institute or university.
Some cult stocks are waiting for the rebound. Fallen angels in the past become cult stocks. These are the ones with multi-billion market caps and high stock prices way back in the tech-bubble period between late 1990s and early 2000s, but now trade as very low-priced stocks. With locations around the globe, these are situated on all continents and used to be included in the S&P 500.
Regardless of market caps, internet incubator firms are also categorized as cult stocks. Most of them have some viable businesses that retain their legitimacy, and some of these were huge during the dotcom bubble. Yes, these companies come and go. But these stocks have healthy balance sheets and outstanding investments.
So it is worth venturing into cult stocks? It is a case-to-case basis. But before getting into these stocks, do your due diligence and be skeptical.
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