Mythic status is typically reserved for sports heroes and Oscar winners, but lately a bunch of stocks have acquired the mantle. These issues are sitting on astronomical price gains and have a cult-like devotion among their followers, I mean, shareholders.
You know the type: true believers intent on convincing you their company is changing the world and destined to grow forever. With a religious fervor, they tweet and blog and paint Facebook walls to defend their investments. It’s no surprise cult stocks are the most dangerous kind to sell short (try to profit from a falling stock by selling borrowed shares with the intention of buying them back for less).
That’s not to say these companies don’t deserve special status. “They become cult stocks because they pass the uniqueness test,” says R.J. Hottovy, Morningstar’s director of consumer research. This comes from creating a unique product or retail or food-service concept. Some are fads, like Crocs, and blow up fast, taking late-arriving speculators for every last dollar. Others succumb gradually to knockoffs, changing tastes, or some rival’s better technology. But enough develop their brands into icons and accumulate immense financial firepower.
No wonder, then, that such companies’ shares don’t just appreciate steadily. They soar far beyond what is realistic if you link the stock to fundamentals such as the profit margin or the earnings growth rate. Eventually, it gets tough to reach ambitious targets for year-over-year sales and earnings growth. But in a market starved for stories, who is to say a cult stock cannot go ever-higher on momentum?
So we decided to study six to see if the business remains on the cutting edge and if their devotees still drink the Kool-Aid. (All prices and stock-related data are as of March 16.)
Apple (AAPL, $330.01)
It’s no shock that the king of the cult stocks is Apple. Whenever Apple launches a new product — think iPod, iPhone, iPad and iTunes — it changes the consumer electronics industry and a lot of others, including Wall Street. As we pass the two-year anniversary of when the stock market bottomed in early March 2009, Apple stock has more than quadrupled from its 2009 low of $78. The Standard & Poor’s 500-stock index only doubled.
While Apple’s product lines have seen phenomenal growth, Apple only owns a small share of its growing markets. The iPhone holds 16% of the global smart-phone market, and the Mac claims less than 5% of the world’s personal-computer volume. Apple shares trade at just 15 times this year’s earnings estimate, almost a five-year low for the price-earnings ratio. Compared to the S&P 500’s P/E of 15 times 2011 estimates and 23 for big tech stocks, Apple actually looks cheap. We rate it BUY
The other five cult stocks are Netflix (NFLX), Amazon.com (AMZN), Priceline.com (PCLN ) Chipolte Mexican Grill (CMG) and Polo Ralph Lauren (RL).