Story Stocks: Definition, Characteristics, and Investing Tips

A story stock is a term used to describe shares of a company whose value primarily hinges on anticipated outperformance, groundbreaking innovations, or favorable media attention rather than traditional fundamental metrics such as assets and income. Investors are drawn to story stocks due to their potential for substantial growth, often leading to share prices that exceed the company’s intrinsic value.

Story stocks typically exhibit several key characteristics:

Investor enthusiasm and positive sentiment towards the company’s future prospects are the driving forces behind story stocks.

Valuations of story stocks are often disproportionate to their current earnings, leading to high price-to-earnings ratios.

Story stocks frequently attract significant media coverage, amplifying investor interest and contributing to heightened volatility.

While story stocks can emerge in various industries, they are commonly found in dynamic sectors such as technology, biotechnology, and pharmaceuticals, where groundbreaking innovations and potential breakthroughs capture investors’ imaginations.

Story stocks often attract substantial media attention, driving heavy trading volume and investor interest. While some story stocks may realize their potential and achieve significant success, many fail to live up to expectations. The prevalence of story stocks in the market fluctuates depending on market conditions, with bull markets fostering their proliferation while bear markets see their rarity.

Investing in story stocks is not without its risks. Despite enthusiastic investor support, story stocks often face skepticism from short-sellers who doubt their long-term viability. Consequently, story stocks frequently experience above-average short interest, contributing to price volatility and market uncertainty.

In 2013, CNBC’s Jim Cramer popularized the term “FANG,” referring to four dominant technology stocks: Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google’s parent company Alphabet Inc. (GOOG). Apple (AAPL) later joined the group, forming FAANG. These companies exemplify the story stock phenomenon, with their valuations driven by anticipation of future growth and technological innovation.

The FAANG stocks have delivered remarkable performance, outpacing broader market indices. However, comparisons have been drawn between their valuations and the dot-com bubble of the early 2000s, prompting concerns about market overheating. Despite these concerns, some analysts argue that the current tech landscape offers ample room for growth, fueled by advancements in cloud computing, social media, e-commerce, artificial intelligence, machine learning, and big data.

Story stocks are frequently found in dynamic sectors such as technology, biotechnology, and pharmaceuticals, where innovation and breakthroughs drive investor excitement and speculation.

While story stocks offer the potential for high returns, they are also characterized by heightened volatility and speculative nature. Investing in story stocks entails significant risks, including the possibility of substantial losses if expectations are not met or market sentiment shifts.

Unlike traditional investments that are valued based on fundamental metrics such as earnings and assets, story stocks derive their value primarily from anticipated future developments, innovation, and investor sentiment. This divergence from traditional valuation methods contributes to the unique characteristics and risks associated with story stocks.