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When Trading “Story” Stocks, It’s Best to Read Between the Lines

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May 7, 2015
Trading story stocks, from tall tales to current classics

The stock market might be likened to a Broadway show or big summer blockbuster flick. It’s a cavalcade of leading names, character actors, bit players, and many others, each with a story to tell.

You might think of “story” stocks similarly. The term is tossed about frequently in the financial news, and it can mean many different things, depending on the company, the industry, the storytelling medium, and other factors. So just what makes a stock a “story,” and how do you spot one before the rest of the world finds out?

There were 5,251 companies listed on the NYSE and Nasdaq markets at the end of February, according to the World Federation of Exchanges. Only a relative fraction receive any mention on CNBC or other major news organizations. Yet, there’s more information than ever right at our fingertips. That means there’s no excuse for not doing your homework to separate the “classics” from the “tall tales.”

Buzz Factor

Assessing a story stock’s longer-term viability, in part, involves getting a handle on market expectations and sentiment, says Joe Bell, senior equity analyst with Schaeffer’s Investment Research. A story can cut both ways: it might be bullish (a company with a popular new consumer gadget, for example) or bearish (product recalls, lawsuits, exposure to slumping oil prices, and so on).

A stock’s story may unfold over weeks, months, or years; quarterly earnings reports and other single-moment events can also create a story stock, even if just for a few minutes (see figure 1).

Live News feed on MarketWatch tab on thinkorswim trading platform

FIGURE 1: THE NEWS TODAY. A Live News feed (yellow circle) is available under the MarketWatch tab (red circle) on thinkorswim® from TD Ameritrade. Earnings reports (yellow arrow) and other events that can move stock prices are also available through the calendar function. Source: TD Ameritrade’s thinkorswim platform. For illustrative purposes only.

“Maybe a stock is not getting mainstream attention or suffers from low expectations,” Bell said. “Perhaps there’s money on the sidelines. Perhaps there’s upside.” Such an out-of-favor stock may have a low price-to-earnings ratio, for example, compared to others in its industry.

Conversely, a trendy media darling that garners hefty valuations and substantial buzz may be a “crowded trade,” Bell said. “It’s not an unknown anymore. If it’s gotten so much attention … you may be late to the party. The crowd has been in the stock for quite some time and it may not have a ton of upside.”

Obviously, parties (and stories) eventually come to a close. Story stocks, individually or collectively, sometimes bring unhappy endings (remember the dot-com boom of the 1990s).

Media Creatures

A story stock needs a storyteller, of course, which brings us to CNBC and other media outlets. The financial news organizations aim for stories with the greatest “news value” to reach the widest possible audience—to “appeal to the masses,” as Bell puts it. Although it’s important to stay abreast of current events, you don’t want to become a slave to the headlines.

Look at the level of media coverage, although this is anecdotal and difficult to quantify. Think magazine covers and mentions on social media, as well as cocktail party conversation. Your cousin or golf buddy may have a bona fide stock idea (or not). Proceed with caution.

Put on Your Reporter’s Hat

Next, do some spadework. If our modern information age enables everyone to be a trader, in a manner of speaking, it also enables everyone to be a reporter. Headlines from the established news organizations are merely a starting point. Don’t forget other sources of publicly available information, such as press releases and regulatory filings, as well as the world’s personal real-time newswire, Twitter (see figure 2).

My Dock modules provide streaming news, stock events, and trending Twitter topics

FIGURE 2: WHAT’S MOVING. Modules that provide streaming news, stock events, and trending Twitter topics (yellow arrows) are available under My Dock (yellow circle) on tdameritrade.com. Source: TD Ameritrade. For illustrative purposes only.

Bell suggests looking at investor surveys and analyst reports, which can offer deeper insight into market sentiment or the profit margins and other financial metrics of specific companies.

He also recommends following the money: actual market activity—buying and selling, in other words. This includes options market activity (for example, a spike in trading in far out-of-the-money calls or puts), volatility measures, and short selling. Some story stocks have high short interest, a sign that hedge funds or other market professionals are betting the company is overvalued and headed for a fall.

As you plot your trading or investing course, whether your preferred “genre” calls for thrills and chills or just curling up with something more sedate, make sure you have a firm grip on the facts and avoid the fiction. Remember, you’re the lead actor in your own investing story.

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