Story Stocks, What are they and should I avoid them?

What is a Story Stock? Well I don't know if I invited that phrase but my definition of it is simple. A stock that is built around a story. Yes every company has its own story what they do, when they started, their growth etc...

But what I am talking is the company that is ONLY selling the story. They talk about the industry as a whole. (The following is just general #'s of what a typical story stock might say...) The company deals in the medical field and say they have a drug that may down the road cure cancer. The company talks about how big the medical industry is, In the many billions! The company says if we could even just get 1% of the market we would have $100 million in sales. Or our net earnings would be $1 per share. Yet the company is trading for .50-$3.

What they don't tell you is they just have an idea and it takes YEARS upon YEARS to develop a drug and it is very expensive. So in the meantime they will be issuing more and more shares of stock. Which dilutes the shareholder value while the CEO is making $100,000+ salary. It could be years upon years before they see even $1 in revenue. Yet that company could have a marketcap of $100 million.

That is what I consider a story stock. A company that has a goal and its a big goal but they are NO WAY NEAR IT. And the value of the company is already valued as if they were already at that goal. THAT IS BIG TIME TROUBLE STAY AWAY!!

Another example (I won't mention company names in case someone mistakes this as a good stock.)

This company deals with WIND Energy. What a GREAT STORY! It is a very hot sector right now. And who wouldn't want to use wind energy. I would love to have wind energy myself getting electric based on mother nature its a great concept. I am by no means an environmentalist but if I can save money and it helps the enviroment then great.

This company was selling a story that wind energy is the future. (Which it may be.) That getting just a small portion of the energy market can mean millions upon millions of revenue. (Which it would.)

I ran across this stock 2 years ago and it was trading in the low $1+ range. Today it is trading at .10 and has a market cap of $3.4 million. So it has roughly 34 million shares outstanding. I don't recall what it had a few years back but even if it was 10 million shares that was a $10-15 million marketcap.

In those 2 years you know how many wind machines they have sold? 0, yes ZERO! They haven't had any revenue in that time.

You know how much the CEO of the company makes per year? $225,000 You know how many employees they have? 11

Not a bad job shuffling papers around not having ANY REVENUE but still making a nice check.

You know how much they spent on Selling and Administration (basically salaries) for the quarter ending June 2006? $1.3 MILLION!! Yet they had NO REVENUE!

Will that company eventually have revenue? I don't know but what I do know is they will issue more and more shares to continue to pay salaries of the CEO and other employees and go deeper and deeper in debt.

So now you know a couple of examples of a story stock, how do you know the stock you are looking at is a story stock?

Well if you get a little 6-8 page magazine all about a Stock via Snail mail. 90% chance that is going to be a story stock.

If you get a spam email talking about a stock that is going to go from .50-$3 in the next 5 days 99.9% chance that is a story stock.

The risk in a story stock is just too great. Because the only thing holding it up is just that a story. The ONLY people that usually win is the company as if the stock goes up they issue more and more stock at the higher price so they can pay for more things. And with story stocks people seem to get sucked into the story so much they aren't able to see a way out of it.

Go on yahoo.com and click finance and enter the stock symbol you can see what the company revenue has been and comments about it. It may even have a message board. Which SOMETIMES can be helpful. It is your money do a little research. A story stock can be found out very quickly and you really don't need to know a lot about reading the #'s etc.. If in doubt go to http://www.StockDoubling.INFO and I will research it for you if you are really interested in it.

If the email, article or message board you read is ONLY talking about the industry as a whole and not what the companies #'s are YOU HAVE A STORY STOCK.

AVOID AT ALL COSTS!

I have been in story stocks and have been BURNED many times with them. For every 1 good story stock that will have a SHORT term run you will have 10-15 that will fall flat on their face.

Watch for a company with earnings, revenue, book value etc... If it has a good story that is a great benefit but it CAN'T be the main focus of the company.

Steve Hoven, is a trader and creator of http://www.StockDoubling.com Is it possible to turn $500 into $1,000,000? Well he is trying to find out. If you start with $500 and double your money once a year you could turn $500 into $1,000,000. After just 17 months he already has $4000+ well ahead of schedule. Check out http://www.StockDoubling.com for all the details.