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People tend to get agitated when Jim Cramer calls a stock a cult stock. But on days like Monday, when the Dow struggles to hold gains for the year, it is important to point out that the cult stocks all did well.
A cult stock is not a dirty four-letter word; on the contrary, it can be an opportunity!
Cramer has always defined a cult stock as one that is very hard to value because it does not trade on traditional valuation metrics. So, instead of the stock flying based on earnings, a cult stock like Netflix trades based on a sexy press release or a new television show.
"When stocks fly into orbit, breaking free from all traditional valuation restraints, I have a hard time telling you to buy them. That's because with the underpinnings of fundamental analysis, I run the risk of making a mistake that could really hurt any potential buyers," the "Mad Money" host said.
Besides Netflix, other names that are the most obvious cult stocks are Amazon, Shake Shack and Tesla. Often, Cramer finds that these stocks have a "someday" factor to them. Investors believe that someday they are going to make a ton of money, and they want to be there when it happens.
Cramer has also seen cybersecurity stocks like Palo Alto, Fortinet, Cyberark and FireEye trade into the cult category, as he is starting to have a hard time to justify them based on earnings.
"It's simply about opportunity, as in the opportunity for the bad guys to hack everything is so vast that you want to own some of these plays just because they're so frequently called on to help stop cybertheft," Cramer explained.
So, while the cybersecurity plays appear to be obscenely expensive compared to other stocks—that is okay by Cramer, because it makes a ton of sense given how hot their market is.
Another stock that is about to break into being a cult classic, is Ambarella. This company is the brains of so many of the cool cameras people use, including GoPro. It covers everything from professional intellectual property cameras, automotive dash cameras, drones and home-monitoring cameras.
Cramer was totally confused by this stock when it reported better than expected numbers and then sold off. What the heck happened?
It was because the stock was up more than 100 percent going into the quarter; most of the time, that can end badly. However, Cramer thinks this amazing growth rate is indicative of the stock's potential to go higher and wouldn't be surprised to see it at $127.50 soon.
But that's not even why Cramer is excited about Ambarella's growth. The real money maker is drones, as the company expects to see a million units sold.
So, why doesn't Cramer just tell everyone to run out and buy it? Because he's stuck in an earnings pickle. How could he tell investors to buy a stock after it just moved 113 percent year-to- date?
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"The truth is I have no choice but to say it, because it's doing much better than I expected. I just have to own that I'm way late to the first move and need to count on another wave of products—the door phone—coming out without much competition," Cramer added.
Either way, Ambarella is about to become a cult stock, and that's not necessarily a bad thing. Just because it's a cult stock, that doesn't mean Cramer wants you to sell it. But it is important to know that at these high levels, it trades on momentum and not fundamental valuations. As long as you're comfortable with that, then Ambarella is for you.