Daily investment jargon includes all kinds of established categories for stock types, such as large cap, small cap, growth or value. In other instances, stocks are grouped by sectors or segments such as financials or technology. People invest in these stock groups every day.
However, there is another unofficial name for a group that reflects a stock or concept du jour -- a name or concept in favor for a short period of time. I refer to these as “cult stocks,” and as the name suggests, these stocks attract the novice investor seeking bigger and better returns. They also tend to have a maniacal following. On the surface, investing in them appears attractive. But, like a wolf in sheep’s clothing, they are scary and should be avoided.
One example of a cult stock is Twitter (NASDAQ – TWTR.) For the record, I like Twitter. I use it (for business purposes only) but I see value in its offering. The stock has its fans and detractors and users of the service who are also investors tend to be fans of the stock too, and that is dangerous. Why? I believe its true value as a stock is far less than its current market cap and that could end up being a big problem.
Yesterday, Twitter stock rallied due to its better-than-expected business performance. I say business because the number of users online exceeded expectations, as did some revenue metrics. Still, despite this accomplishment, Twitter reported a loss of over $144 million on a GAAP basis. Even if one were to look at the $0.02 per share GAAP results, it seems outrageous that the stock would be worth $27 billion, or 27x this year’s estimate sales. But, since it is a cult stock, it is afforded this valuation. Rest assured it is not sustainable.
Cult stocks do not have to have high market caps or valuations. It is not uncommon for stocks of companies with the latest consumer trends or the appearance of being a player in the new trend to build a large and loyal following of investors. Like a cult, these companies are led by evangelists, rather than operators. And, like cult leaders, they can whip up a crowd into a frenzy, and through the issuance of flowery press releases and meetings, keep their stocks well above fair value.
While it is clear that these types of stocks should be avoided as they represent more hype that substance, it is impossible to predict when the other shoe will drop and too hard to forecast the order of magnitude of the inevitable fall. Therefore, do not play against the trend as you could be burned just as badly as those in support of it. The most important thing is to be aware of them so you can stay on the sidelines and gravitate to other, non-cult stocks.
Most people find it hard to believe that I rarely invest and trade stocks. One of the reasons for this stance is that I do not want to get involved in securities profiled in these and other pages. It sends a bad message, in my view.
When I do trade, I am patient and prudent. I always use limit orders to buy and establish stop-loss orders on sales. My biggest mistake tends to be selling too soon, but you can’t go broke taking a profit, as the old saying goes. Lately, I am off my game and on an annoying losing streak. If I am torn between two stocks I always seem to pick the wrong one. These maddening situations happen to us all, and like a baseball player that is on a hitless streak, we must be diligent to return to tip-top shape. Here are some tips to get you (and me) back to where we belong.
We can finally rejoice in the volatility that has returned in recent trading sessions. This means opportunistic investors who are not comfortable with a great deal of market exposure have a chance to earn profits via day trading and swing trading. If you play your cards right, you also may find that this week may be the best week to do exactly that by trading the right stocks ahead of earnings reports.
On the surface, it may seem that trading ahead of earnings reports is an incredibly risky tactic. Plus, with hundreds of stocks reporting their second-quarter financial results this week alone, how does one discern the difference between a favorable opportunity and a poor one? While this tactic carries a good deal of risk, as do most quick trading ideas, finding the right stock is much easier than you think.
Longtime readers of The Stock Junction have likely noticed that I am not a maniacal follower of the yellow metal. That may be counterintuitive, considering my last name is Goldman, but, it is what is. I have only been passively following gold’s price movements in recent months weeks as I am a big believer that historically, small-cap equities is the place in which to be invested as we head toward the latter quarter of the year. Still, recent events have prompted me to wonder if now is the time to start buying gold.
First, a primer is on order. Since 2013, the price of gold has dropped significantly following an extended bull market, which largely occurred from 2004 through mid-2011 when the price of gold rose by nearly 400%. A slight drop from 2011 to 2013 precipitated the current environment of an oscillating price range from $1,200 to $1,400 per ounce. Interestingly, despite the decline in prices since 2011, the price of gold remains over 300% higher today than it was 10 years ago.
Few industry segments have received as much attention and notoriety as the marijuana space. Like many of you, I have been following the industry, and the stocks that (supposedly) represent its emerging leaders, with earnest. Now that much of the hype has subsided and valuations have largely been cut in half, the bloom is off the rose. Therefore, the time is ripe to address the “do’s” and don’ts” of marijuana stock investing.