A stock’s ‘sex appeal’ plays big role in price

Investors greatly underestimate a stock’s ‘sex appeal’ when they’re trying to value a company. There are a handful of companies that have something special: a great niche at precisely the right point in history, a compelling story or a truly revolutionary idea. Those stocks don’t trade on reason and numbers alone. They trade on beliefs, ‘gut feelings’ and a desire for change in the world.

Last summer, a friend of mine asked me what I thought about investing in Tesla (TSLA). At the time, Tesla had shot up from $30 to north of $100. It was up more than 250 percent in the space of a few months. I told my friend we’d missed the boat. The stock had run too far too fast.

Boy was I wrong. Telsa has more than doubled since then. And that leads me to my thesis for this post: investors greatly underestimate a stock’s ‘sex appeal’ when they’re trying to value a company. There are a handful of companies that have something special: a great niche at precisely the right point in history, a compelling story or a truly revolutionary idea. Those stocks don’t trade on reason and numbers alone. They trade on beliefs, ‘gut feelings’ and a desire for change in the world. Put another way, they trade on hope, hype and hot air.

And yet, we can’t discount the power of a transformative company or CEO to grow into incredibly high expectations for a stock. The example I like to give is Amazon (AMZN). People complain about the valuation of a company like Facebook (FB), which is trading at a P/E of 92. But people aren’t that surprised Amazon’s trading at a P/E of 587!

And yet, Amazon is one of the few tech stocks that’s trading well above it’s dot-com highs from the late 1990s. 15 years ago, Amazon was just an online bookseller. Today, it’s a retail shopping giant, a media powerhouse for online movies, music and books, a hardware manufacturer, a cloud hosting company and a database of product reviews that’s unrivaled. Amazon has lived up to the hype.

Not every company lives up to the hype, of course, but you can’t deny that a few companies do. With that in mind, here’s my stab at a list of the Top 12 stocks with the biggest ‘sex appeal’ right now:

  1. Tesla (TSLA)
  2. Facebook (FB)
  3. Netflix (NFLX)
  4. Amazon (AMZN)
  5. Twitter (TWTR)
  6. Plug Power (PLUG)
  7. Pandora (P)
  8. RF Micro Devices (RFMD)
  9. Under Armour (UA)
  10. NQ Mobile Ads (NQ)
  11. 3D Systems (DDD)
  12. HEMP (HEMP)

I’m going to start blogging more about each of them regularly in the future so stay tuned!