6 Cult Stocks to Buy and Sell

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).

SEE IT IN SLIDES: 6 CULT STOCKS TO BUY OR SELL

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.

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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.

KIPLINGER’S STOCK MARKET MADNESS: Join Fellow Investors in Voting for Apple and Other High-Flying Stocks

Netflix (NFLX, $213.84)

By destroying the video-store industry, Netflix shares have leapt 555% from the market's bottom and 1,192% from its own recession low of $18. Netflix doesn't only mail rented DVDs. It has streaming video technology, so it's a major source of digital direct-to-your-screen entertainment. And it may soon offer original programming for the first time.

But one of Netflix's biggest issues is ease of entry into its primary business. Cable companies are taking aim, and Amazon just introduced streaming-video service. Netflix has been in a sweet spot between what's left of the rental stores and the onslaught of digital streaming. Unless Netflix finds a new big thing, it may end up trapped in the middle.

The average revenue per Netflix customer is in decline, but it gets tougher to lure new customers because of widening competition. It will also become dramatically more expensive for Netflix (and everyone else) to buy the rights to stream films, cutting profit margins.

There are rumors Apple may buy Netflix, but talk among the faithful has turned negative, and the stock is down 13% from its February high of $247. It trades at 49 times estimated 2011 earnings of $4.39 per share. UBS gives it a $140 price target and says SELL. We do too.

KIPLINGER’S STOCK MARKET MADNESS: Join Fellow Investors in Voting for Netflix and Other High-Flying Stocks

Amazon (AMZN, $164.70)

From $60 at the market's bottom, Amazon.com has nearly tripled to $164.70, 14% off its $191 high, set in January. Yet it still trades at 52 times 2011 expected net income. Amazon has ardent fans because it is the world's largest Internet retailer, but that doesn't mean shareholders will continue to get this kind of performance.

For one thing, as Amazon vies with Netflix and others in the streaming-video business, it will also pay much more to acquire content. Amazon is spending heavily on technology infrastructure and distribution centers, two needs that hurt earnings in the most recent quarter. In addition, Amazon is likely to cut prices to keep inventories from overflowing and because of greater competition in e-books. This practice menaces any retailer's profits and stock price. Revenue is expected to grow 31% in 2011, down from 40% in 2010, and net income looks to grow at the same 28% this year as last year. A P/E in the 50s is high given this forecast. We think this story could have an ugly ending. SELL.

KIPLINGER’S STOCK MARKET MADNESS: Join Fellow Investors in Voting for Amazon and Other High-Flying Stocks

Priceline.com (PCLN, $455.96)

If Priceline keeps up its pace, it will go, as spokesman William Shatner might say, where no stock has gone before. Shares of the name-your-own-price travel booking site are nearly ten times the 2008 low of $47 and up almost sixfold from $78 at the market's 2009 low.

That's not necessarily a fluke; the travel industry typically posts big gains in the early part of an economic recovery. But now Priceline is facing headwinds. Airlines are flying less and charging more. High oil prices also affect car trips, hurting hotel bookings. Turmoil in Africa, the Mediterranean and the Middle East could curtail international travel, one of the company's biggest growth areas. Priceline shares trade at 24 times 2011 expected earnings, while rival Expedia sells at a P/E of 11. More troubling, the faithful have started to worry Priceline is coming in for a crash landing. Insiders are exercising options and selling shares. We'll join them and rate this SELL.

KIPLINGER’S STOCK MARKET MADNESS: Join Fellow Investors in Voting for Priceline and Other High-Flying Stocks

Chipotle Mexican Grill (CMG, $258.66)

Cult stocks aren't limited to the Internet. By serving better and cheaper meals than the usual chain restaurant, Chipotle has sold investors on its recipe. The stock has soared 669% from its recession low of $39 in November 2008. That's phenomenally better than Starbucks or McDonald's, to name two other excellent food-service investments.

But now the entire restaurant industry is seeing rising food and packaging costs bite profits. Chipotle chief financial officer Jack Hartung says freezes in Mexico and Florida could add two percentage points to Chipotle's food costs, but Chipotle knows a price hike could alienate customers. The shares trade at 38 times 2011's earnings estimate of $6.74, compared to a P/E of 18 for the restaurant industry. The true believers offer mixed signals, but the pros sense Chipotle is no longer the flavor of the month. We agree and say SELL.

Polo Ralph Lauren (RL, $121.19)

The cult of Polo Ralph Lauren has moved from the shirts to the shares. While high cotton prices hurt competitors, Ralph Lauren doesn't care as much about these costs because it sells luxury-priced garments and accessories to wealthy men and women the world over. At $121, the stock has quadrupled from its $32 low in March 2009. Still, it's at a reasonable 21 times expected earnings for the fiscal year ending March 2012, compared to an average P/E of 26 for its industry. Ralph Lauren is in the right spot to capitalize on a series of favorable trends, both here and in other countries. In February, the company doubled its dividend rate. A business has to feel secure about its profit stream to do that. We say BUY.

SEE THIS STORY IN SLIDES: 6 CULT STOCKS TO BUY OR SELL