10 High-Risk Stocks To Buy For Massive Rewards
These 10 stocks to buy offer big risks and even bigger potential returns
Slow and steady wins the race, as the old adage goes. But slow and steady can be a bit boring. Investors looking for stocks to buy, as a rule, should focus on high-quality, and preferably lower-risk, issues.
Still, there’s room in any investor’s portfolio for higher-risk, higher-reward plays — as long as those risks are understood.
In that vein, here are 10 stocks to buy that offer potentially significant rewards, and almost as much risk. None of these stocks should be a core part of a portfolio, and all have the potential to blow up in your face.
But taking those risks also creates the possibility of a major reward. It’s likely at least a few of these stocks will wind up big winners going forward.
10 High-Risk Stocks to Buy: Teva Pharmaceutical (TEVA)
Teva Pharmaceutical Industries Ltd (ADR)(NYSE:TEVA) is a mess right now. The company still has no permanent CEO, with interim CEO Yitzhak Peterburg Teva’s fourth boss this decade. The company pulled down 2017 earnings guidance after its second-quarter report, leading TEVA stock to plunge. It’s since reached a fourteen-year low.
Teva has too much debt and no growth. Its key drug, Copaxone, which treats multiple sclerosis, is facing generic competition from Mylan N.V. (NASDAQ:MYL), among others. Bankruptcy likely isn’t a near-term scenario — but the current trajectory suggests it could occur down the line. In short, TEVA is a classic contrarian, “buy when there’s blood in the streets” type of play. And there are reasons to take the risk in TEVA stock.
TEVA is extraordinarily cheap, trading at about 4Xearnings. Pressure has persisted on generic drugs, but it won’t last forever. The company is starting to sell assets to clean up its balance sheet, which would de-risk the story here somewhat. Basically, TEVA is a less well-covered version of the story at Valeant Pharmaceuticals Intl Inc (NYSE:VRX) — and, in my opinion, a better version, with a cheaper stock and an easier path back to normalcy.
It’s a risky path, but if it works TEVA could double simply by getting back to 7X to 8X EPS multiples and removing bankruptcy fears.
10 High-Risk Stocks to Buy: Scientific Games Corp (SGMS)
The story already has played out somewhat at Scientific Games Corp (NASDAQ:SGMS), which has risen a whopping 150% so far this year. But that story isn’t necessarily over — even if the elevated stock price might add a bit of risk.
Only a few years ago, Scientific Games was a sleepy, low-growth provider of lottery tickets and terminals. But in quick succession, SciGames acquired slot machine manufacturers WMS Industries and Bally Technologies, the latter coming only months after Bally bought equipment maker and gaming table designer Shuffle Master. Scientific Games became the dominant supplier to the casino industry worldwide — a “one stop shop” for casino floors.
It also became one of the most indebted companies in the U.S. markets — and still is. The company has a whopping $8.2 billion in debt, and even with improved results, its debt-ebitda ratio is above 6X. The combination of that debt and careful cost controls at casinos, particularly in the U.S., kept SGMS stock below $10 as recently as a year ago.
But it now looks like the long-awaited “replacement cycle” of slot machines is arriving — and that could be hugely beneficial for Scientific Games and its smaller, similar rival Everi Holdings Inc(NYSE:EVRI). And given how much leverage is still on the balance sheet, there’s a case for SGMS to clear $100 — yes, $100 — if profit growth accelerates.
That’s not a guarantee, obviously, but it’s the nature of highly indebted companies. Leverage is a weight when those companies struggle, and it’s a springboard when they grow.
10 High-Risk Stocks to Buy: Chesapeake Energy (CHK)
In the case of Chesapeake Energy Corporation (NYSE:CHK), leverage has been a weight. And after optimism about stable energy prices and Chesapeake’s improved balance sheet boosted CHK stock in late 2016, it’s been nothing but downhill. CHK now trades at a 14-month low.
But I still think CHK is the best, if riskiest, play on higher energy prices. At the least, Chesapeake has bought itself more time for those prices to work higher. It’s also worth pointing out that Chesapeake bonds actually have been rather stable so far this year. Efficiency improvements at the wellhead have lowered costs as well.
Chesapeake isn’t going anywhere, except perhaps down, if oil and gas prices don’t improve. And a “lower for longer” scenario could raise solvency questions down the line. It is a risky play. But the combination of debt on the balance sheet and leverage from higher energy prices mean that with a couple of changes, CHK could soar.
10 High-Risk Stocks to Buy: Supervalu (SVU)
Supervalu Inc. (NYSE:SVU) is another contrarian play, this time in the grocery/supermarket space. Grocery stocks have been hammered since a one-two punch in June.
On the 15th, Kroger Co (NYSE:KR) announced a cut in full-year earnings guidance, raising fears of further price competition in the space. The next day, Amazon.com, Inc. (NASDAQ:AMZN) announced its acquisition of Whole Foods Market, Inc. (NASDAQ:WFM).
The combination sent investors in grocery stocks scrambling — and SVU stock hasn’t been spared. It’s declined about 30% since those two June events, and over 46% over the past year.
But if the Amazon fears, in particular, are overstated, SVU stock has clear room for a rebound. The recent acquisition of Unified Grocers strengthened the profit base. And SVU stock trades at under 5x ebitda, even including capital leases and pension obligations. SVU is one of the cheapest stocks in a cheap and hated space. If that sentiment turns, SVU would be the most likely, and perhaps largest, beneficiary.
SVU is one of the cheapest stocks in a cheap and hated space. If that sentiment turns, SVU would be the most likely, and perhaps largest, beneficiary.
10 High-Risk Stocks to Buy: Splunk (SPLK)
Splunk Inc (NASDAQ:SPLK), on the other hand, isn’t the cheapest stock in its space — or anywhere else. The high-flying “operational intelligence” software provider still trades at nearly 8X revenue, and 81X 2018 analyst EPS estimates.
The valuation alone shows the risk in SPLK, which has pulled back from brief early-2014 highs above $100. But since that pullback, SPLK stock actually has been rather stable, as investors give the company time to grow into its valuation. And grow it does, with fiscal Q2 revenue growth of 32% driving a nice beat of consensus expectations.
Meanwhile, Splunk continues to be a likely acquisition target, with Cisco Systems, Inc. (NASDAQ:CSCO) cited as a potential buyer in June and International Business Machines Corp.(NYSE:IBM) long thought to be a logical acquirer.
Splunk is a classic growth stock in that it, too, is high-risk and high-reward. But it looks like one of the better growth stocks in what might be an over-aggressive market at the moment.
10 High-Risk Stocks to Buy: Ship Finance International (SFL)
The shipping space generally has been a “Bermuda Triangle” for investor capital, but Ship Finance International Limited (NYSE:SFL) might be the exception to the rule.
There’s likely to be some near-term volatility, as Seadrill Ltd (NYSE:SDRL) files for bankruptcy in the coming weeks. And Ship Finance’s dividend, which currently yields 13%, could be at risk in that scenario.
But this also remains one of the best plays in shipping, available for a modest premium to book value and at low-teens multiple to earnings. The industry alone, and a heavily leveraged balance sheet, both show the risk.
But if Ship Finance can make it through some choppy waters over the next few months, there’s likely a nice return for shareholders on the other side.
10 High-Risk Stocks to Buy: GW Pharmaceuticals (GWPH)
There’s no sector of the market more boom-and-bust than biotech and drug development. GW Pharmaceuticals PLC – ADR (NASDAQ:GWPH) doubles down on that volatility by developing its drugs from marijuana.
But GW Pharmaceuticals isn’t some fly-by-night penny stock based on legalized weed. It’s a $2.6 billion pharmaceutical company with a legitimate lead product candidate in Epidiolex, aimed to treat Dravet Syndrome and Lennox-Gastaut Syndrome. Sativex, used to treat multiple sclerosis
Sativex, used to treat multiple sclerosis spasticity, already is on the market. And another compound has potential uses to fight epilepsy and treat autism spectrum disorders.
Like most drug development plays, GWPH is high-risk. But there’s reason for investors to hold long-term optimism toward the company’s pipeline. Success in getting those drugs to market likely would make GWPH an acquisition target at some point. That in turn, would suggest likely significant upside from current levels for GWPH stock.
That in turn, would suggest likely significant upside from current levels for GWPH stock.
10 High-Risk Stocks to Buy: Canadian Solar (CSIQ)
Given that solar power actually is gaining an increasing share of the U.S. market, in particular, it’s surprising that solar stocks including Canadian Solar Inc. (NASDAQ:CSIQ) actually haven’t done all that well. SolarCity had to be rescued by Tesla Inc (NASDAQ:TSLA). First Solar, Inc. (NASDAQ:FSLR) is down from multi-year highs despite the recent strength.
There are risks for CSIQ, in particular. “Commoditization” and price pressure could hit margins. The company is rolling out a “yieldco” in Japan later this year, which will bring in cash — but a poorly-received IPO of that REIT could impact valuation.
Still, demand for CSIQ equipment is growing, the stock isn’t terribly highly valued, and it’s lagged of late while FSLR, in particular, has risen. Solar stocks are likely to stay choppy for a while — but CSIQ should have some room to run if it can get through the second half of the year.
10 High-Risk Stocks to Buy: Superior Industries International (SUP)
Superior Industries International Inc (NYSE:SUP) is trading at its lowest levels in six years. And yet shipments of the company’s aluminum wheels hit a record in the second quarter.
There’s a reason for the disconnect. Auto parts stocks as a whole have come down of late, driven by “peak auto” concerns in the space. Superior itself has had a couple of missteps that impacted margins, and profits. And with SUP one of the more indebted companies in the sector, both factors have had an amplified impact on Superior’s share price.
But there’s a reason to see a reversal as well. Near-term auto sales may be coming down, particularly in the U.S. But at less than 8x forward EPS, SUP stock isn’t exactly pricing in explosive growth. A recent acquisition of European supplier UNIWHEELS improved Superior’s position overseas. And there is room to improve execution, and hopefully, margins, going forward.
SUP does have potential downside risk, particularly if global macro concerns arise, pressuring auto sales and dropping SUP earnings further. But for contrarians who think the auto parts selloff is overdone, SUP is one of the more intriguing plays.
10 High-Risk Stocks to Buy: Chegg Inc (CHGG)
Chegg Inc (NYSE:CHGG) is another growth stock with a high valuation and a big opportunity. The company began as an online textbook rental company. But it wound up outsourcing that business to another provider and since has focused on becoming the dominant digital platform for U.S. college students.
And Chegg is having some success. Revenues are growing and adjusted ebitda has turned positive after years of losses. The company’s tutors and study services businesses are growing rapidly, and it’s becoming a fixture in the college landscape.
There are risks here beyond valuation. Like so many companies, Amazon is a potential competitor down the line, given its efforts to offer free Prime services to college students. But at this point, it might simply be easier for Amazon to buy Chegg, rather than expend the resources to try and fight it.
With each passing quarter, Chegg gets more and more entrenched. And that only serves to strengthen the bull case for CHGG stock.
As of this writing, Vince Martin has no positions in any securities mentioned.
See Also From InvestorPlace:
- 9 Under-the-Radar Retirement Stocks to Buy
- 3 High-Yield Closed-End Funds for Tax-Free Income
- 3 Energy Stocks Getting a Lift From Hurricane Harvey
Category: Cheap Stocks
