Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

The Cult Stock Pattern: Is This Stock Now a Buy?

Page 1 of 2

At some point, every “cult stock” goes through a period in which investors recognize its overvaluation, causing the stock to fall. In some cases, however, this drop in price can present a worthy investment opportunity at a good value. After it cut guidance yet again, is Outerwall Inc (NASDAQ:OUTR) now a buy?

The cult explained
A “cult stock” is defined as having a large investor following despite somewhat unimpressive fundamentals. We have seen companies like LinkedIn, Tesla, and Workday, among others, fit in this category. These stocks continue to tick higher, often beyond reason, until the lowering of guidance or a change in perception sparks a drastic fall.

Outerwall Inc (NASDAQ:OUTR)

A drastic fall
Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) and Netflix, Inc. (NASDAQ:NFLX) are two of the most high-profile cult stocks to fall in recent memory.

In the five years prior to August 2011, Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) soared 3,500% with explosive year-over-year growth of more than 100%. However, fears of lost patents, high inventories, and slowed growth pushed shares from more than $100 to less than $20.

Netflix, Inc. (NASDAQ:NFLX) had also seen an impressive rally in the years prior to August 2011, boasting 50% sales growth, but then it fell from $300 to less than $70 in just four months. Most notably, fears of slowed growth, margin decompression, and high content costs led to the decline.

The realization: This stock ain’t so bad after all
What’s funny about these cult stocks is that beneath their inflated valuations lie pretty solid companies. Therefore, in the case of companies that have followed the cult pattern (Netflix, Inc. (NASDAQ:NFLX), Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), Questcor Pharmaceuticals, etc.) have also seen a period of realization, or post-fall gains.

Both Netflix, Inc. (NASDAQ:NFLX) and Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) now trade at pre-fall levels but with a different look. Today, Netflix, Inc. (NASDAQ:NFLX) and Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) are experiencing low-double-digit growth, and impressively, their margins have risen. These two companies have eased many of the concerns that led to their fall.

Seeking a second pop
Essentially, the cult-stock fall gives the fundamentals time to reflect on the stock. Then, stocks are more attractive from a valuation point of view. Netflix, Inc. (NASDAQ:NFLX) and Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), valued at a respective 4.5 times sales and three times sales, are much cheaper than they were in 2011.

Now, for value investors, this post-cult space appears to be a good place to seek opportunity. In particular, Outerwall Inc (NASDAQ:OUTR) really sticks out to me.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!