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All Contents © 2019The Kiplinger Washington Editors
By Vince Martin
| February 20, 2018
The conventional wisdom about investing says to manage risk or avoid it. Buy solid companies. Hold for the long term. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” as Warren Buffett put it.
Of course, that’s not nearly as fun — and, indeed, it’s not always the best advice. Higher-risk, higher-reward plays should have a place in younger investors’ portfolios, in particular. And a little bit of risk can add some focus — and potentially some return — to diversified holdings for older investors as well.
Toward that goal, here are 10 high-risk, high-reward stocks. It’s worth reiterating that these stocks only are for risk-tolerant investors and only for a small part of a portfolio.
And in all cases, investors need to make their own decisions as to which side of the trade to take. These stocks are likely to move big, but that can cut both ways.
Prices and data are from the original InvestorPlace story published on Feb. 5. Click on ticker-symbol links in each slide for current prices and more.
What’s fun about AMC Entertainment (AMC) at the moment is that it’s almost a straight bet. Think movie theaters finally are going to see attendance plunge as 4K televisions proliferate and Netflix (NFLX) and Amazon.com (AMZN) drive an online content boom? AMC is a clear short — and indeed, over 38% of the stock’s float is sold short.
After all, the company has a leverage ratio (debt to Adjusted EBITDA) around 5x. If movie attendance declines – or if revenues drop with a push from MoviePass, majority-owned by Helios and Matheson Analytics (HMNY), itself a high-risk/high-reward play – AMC earnings are going to decline – and that debt will drag AMC stock down even further.
On the other hand, if AMC is just struggling with a poor film slate for 2017, as bulls argue, it’s one of the cheapest stocks in the market. The stock is only trading at 7x EV/EBITDA; even stable earnings drive upside from here, with that leverage pushing AMC’s equity value up sharply. AMC traded over $30 as recently as April. A return to those levels should investors write off 2017 as a weak year for the industry would result in over 100% gains from the current price.
I’ve taken the bullish side, arguing back in November that AMC was one of 10 2017 losers to buy. AMC indeed bottomed and has gained since – but the bears are winning so far this year, with the stock down 11% YTD. The battle over AMC likely will continue for some time – but I still think the bulls will come out on top eventually.
There are few bigger battleground stocks in the market right now than Overstock.com (OSTK). The stock used to be a sleepy second-tier e-commerce provider, struggling to drive profits amid intense online competition. Between the beginning of 2010 and the beginning of 2017, OSTK rose just 30% total, an annual return of less than 4%.
The story has changed markedly – and so has the stock. OSTK has quadrupled in just the last six months. The rise in bitcoin, and increasing optimism toward blockchain technology more broadly, has focused investor attention on Overstock’s tZERO unit. Overstock is even considering selling the legacy e-commerce business in order to focus on the tZERO ICO and its opportunities going forward.
The enthusiasm toward OSTK is starting to fade, as the stock has pulled back 25% from a high just shy of $90 reached earlier this month. And I argued last week that the stock looked overvalued to my eye – if an exceedingly dangerous short.
But this is a real story, unlike the hype trains at companies like Riot Blockchain (RIOT) and Eastman Kodak Company (KODK). And on the Q3 conference call CEO Patrick Byrne made an interesting, and compelling, argument about the value of the operating business, claiming that Overstock’s thin ~1% margins actually were a huge success.
Given the willingness of rivals like Wayfair (W) to lose money on every sale, Byrne said Overstock’s results should be lauded, not criticized. And the obvious implication is that once those rivals inevitably burn through capital, OSTK should thrive.
Personally, I’m still skeptical about OSTK’s valuation — but if the company is right in its blockchain move and/or can get a good price for the e-commerce business, the recent pullback may be a buying opportunity.
There was a time not that long ago when healthcare stocks like Tenet Healthcare (THC) were considered safe, defensive plays. A hospital operator like Tenet seemed the perfect defensive play, and as such, investors allowed Tenet to leverage the business sharply.
But concerns have hit THC stock over the past few years. Health insurance changes at the federal level have led insurers to push for increased cost controls and more outpatient procedures. A giant settlement over kickbacks at four Atlanta hospitals cost Tenet dearly. Now, Tenet looks like a low-growth operator (at best) with a staggering debt load. The company finished Q3 with nearly $15 billion in debt — and a market capitalization of roughly $2 billion.
All hope is not lost, however. The company remains sharply profitable on an EBITDA basis. Cost-cutting efforts should save $150 million a year in 2018. The company is looking to sell its Conifer financial services unit in an effort to reduce debt and interest costs.
If Tenet’s new strategy works, the stock could soar, given its leverage. Just a 10% increase in the company’s enterprise value would lead THC shares to rise over 80%. But if declines continue, and Tenet can’t find a savior, bankruptcy is not out of the question.
Owning a hospital stock might seem a safe, conservative play — in this case, it’s quite the opposite.
The nice thing about Nagacorp (NGCRF, NGCRY) is that there’s no doubt of the risks involved. NagaCorp is the operator of NagaWorld, a casino in the Southeast Asian nation of Cambodia, a business model that obviously entails quite a bit of risk.
Trying to market to gamblers in Cambodia might seem like tough business — but NagaWorld actually targets an international clientele. 75% of the company’s VIP arrivals in 2016 came from Malaysia, Singapore, and Greater China.
It’s a very similar market to that seen at larger, better-known operators like Wynn Resorts (WYNN) and Las Vegas Sands (LVS) in the Chinese territory of Macau. NagaCorp targets smaller gamblers — its clientele often is referred to as the “poor man’s VIP” — but it’s had some success in doing so. Growth has been consistent, and a new high-end retail space opened last year, with a “soft opening” of a massive casino expansion following in November.
The risks here are obvious — and numerous. NagaWorld depends on a government-issued monopoly around the capital of Phnom Penh, but that guarantee is only as good as the government issuing it. Any sharp slowdown in the Chinese economy would impact demand from that country – and likely bleed over to other key feeder markets.
But Nagacorp stock still yields over 5%, and trades at a substantial discount to other Asian operators. If NagaCorp can manage the numerous risks facing its business, NagaCorp stock should prosper.
Plug Power (PLUG) has had a volatile, and mostly disappointing, history over its eighteen-plus years on the public markets. The maker of fuel cell-powered vehicles has lost 99.8% of its value from 2000 peaks. As recently as 2013, the stock was left for dead, trading well below $1. A 2014 deal with Walmart (WMT) sent the stock soaring – but PLUG has lost 75% from those peaks nearly four years ago.
Those losses come even as the stock exploded after signing an agreement with Amazon in April. The optimism behind that deal – which included Amazon taking an ownership stake in the company through warrants – is fading once again, however. PLUG is down 18% already this year, and trades at a seven-month low.
The history of the stock alone shows the risks here. And I tend to agree with Brian Wu, who wrote in August that PLUG looked like a stock to avoid.
But PLUG can’t be written off entirely. Its fuel-cell vehicles could find a niche in industrial applications – the same being used by Amazon and Walmart. Gross margins are weak, but costs are coming down steadily as Plug Power scales up. Profitability remains a long way off, but management has forecast positive cash flow as soon as the second half of this year.
The problem is that over nearly two decades, most of those forecasts have proven far too optimistic, and I’m not willing to bet this time is different. But if it is, PLUG could soar once again.
Another stock on a roller-coaster of late is Forterra (FRTA). The business model — manufacturing pipe for water transmission and drainage — doesn’t seem that it should be that volatile. Forterra stock certainly has been.
Indeed, FRTA has been public for 16 months. The October 2016 IPO priced lower than expected at $16.50. By the end of the year, FRTA was at $22. It would lose 85% of its value in less than ten months, nearly quadruple in the next four months, and now has lost 37% in the first 32 days of 2018.
The culprit here, too, is debt. Forterra has $1.2 billion in debt — roughly eight times its 2017 Adjusted EBITDA guidance. Revenue is expected to decline in Q4, and rising scrap metal costs have hit margins so far this year.
But there is one clear hope for a recovery: a potential infrastructure plan from the Trump Administration. The nation’s water infrastructure is in rough shape, and Forterra could benefit from increased spend — and in the near term from optimism that the spend will be on the way.
Like PLUG, the company’s brief history on the public markets proves just how speculative a stock FRTA truly is. And in the near-term, there are clear “falling knife” worries, with the stock falling 20% on Wednesday after a downgrade from Goldman Sachs (GS).
But Forterra’s debt isn’t coming due for three more years; the company has time to turn itself around. If it can do so, the upside could be enormous.
Gaming equipment provider Everi Holdings (EVRI) has risen 600%+ in less than two years. The company was renamed from Global Cash Access after that provider of casino ATMs acquired slot machine manufacturer Multimedia Games in late 2014. But with casino customers focusing on saving money instead of upgrading slots, and the ATM business losing a major customer in Caesars Entertainment Corporation (CZR), investors quickly become nervous and sold off the stock.
What’s somewhat ironic — and somewhat concerning — about the gains of late is that the story hasn’t changed all that much. The Payments segment has had a strong 2017, but the Games business still is well below expectations from just a couple of years back. The long-awaited “replacement cycle” during which US casinos upgrade their games hasn’t really arrived yet. Still, both EVRI and larger peer Scientific Games (SGMS) have soared.
That puts EVRI in an interesting spot, particularly as the stock has flatlined over the past six months. Should that replacement cycle start in earnest — and there are some green shoots, including investments by Caesars with its bankruptcy resolved — EVRI could skyrocket again.
But with a substantial amount of debt, any stumbles could undercut the recent confidence. Everi at the least needs the current strong economy to continue to give its customers the confidence to invest in their products. If that economy sneezes, EVRI likely will catch the flu.
It’s been a truly incredible run for Applied Optoelectronics (AAOI). AAOI started 2017 in the low $20s; by late July it had cleared $100. Optimism toward the fiber-optic networking provider’s role in data centers led to the huge rally.
That optimism dissipated quickly, however. Pressure from a single customer — widely believed to be Amazon, who drove over half of 2016 revenue — led to disappointing Q3 guidance. Q3 numbers missed again, and AAOI now has lost two-thirds of its peak value.
And at this point, AAOI looks intriguing. I passed on AAOI back in October, arguing that the stock simply wasn’t cheap enough around $45. But another 25% decline and a sub-10x forward P/E multiple means that may no longer be the case.
There is likely to be more competition in 100G transceivers, and AAOI may lose share both at Amazon Web Services and possibly second-place customer Microsoft Corporation (MSFT). But the market overall should be growing, and AAOI stock is priced as if earnings will continue to decline.
The balance sheet is clean: AAOI actually has a small amount of net cash. It may not be the right time to enter AAOI just yet, given an ugly chart. But at some point, AAOI very well may be cheap enough.
Much of the retail sector looks like a high-risk, high-reward proposition at the moment, and Sportsman’s Warehouse Holdings (SPWH) is no exception. The sporting goods retailer has struggled so far this year, with comparable-store sales down 7.6% through the first nine months of fiscal 2017 (ending January). Weakness in firearms and ammunition has been a major culprit.
Of course, SPWH isn’t alone in seeing lower firearm sales. American Outdoor Brands (AOBC), formerly known as Smith & Wesson, has seen its stock decline 46% over the past year. And SPWH has the ability to benefit in the rest of the business from the closures of Sports Authority and Gander Mountain. Sportman’s Warehouse also has to room to expand its footprint: the company has opened eleven new stores so far this year.
There are risks here. Unlike many publicly traded retailers, SPWH has a significant amount of debt (roughly $200 million, about the same as its market capitalization). Sales are weak, and the industry overall isn’t performing all that well. But SPWH looks extremely cheap, at under 8x earnings, and there should be some growth if and when firearms sales stabilize.
I’ve recommended SPWH in the past as a cheap stock to buy under $10, and that call looked correct as SPWH cleared $6 in December. But the stock already has pulled back a whopping 26% so far this year — perhaps lowering expectations for Q4 earnings next month. SPWH probably has at least one more rebound in it – but investors need to tread cautiously.
Internap (INAP) is another stock that’s taken a huge roller-coaster ride. The data center and cloud platform provider traded above $40 in early 2015; it was below $5 by late 2016. It’s nearly quadrupled from those lows – and still could have more upside.
After all, Internap is serving growing markets, but the company itself isn’t growing, at least on the top line. If that revenue growth comes, there’s reason to see big upside for INAP stock. The company has cut costs and improved margins: Adjusted EBITDA is guided to rise this year despite the lower revenue. Internap issued stock to reduce debt earlier this year, and then acquired managed hosting provider SingleHop last week which should boost 2018 growth.
Debt, execution, and competition all remain significant concerns. Capital expenditures are high, which pressures free cash flow. And the valuation on an EV/EBITDA basis isn’t that cheap, at about 9x.
But if Internap can start better participating in the growth of its industry, a return back toward mid-decade levels is a definite possibility.
This article is from Vince Martin of InvestorPlace. As of this writing, Martin did not personally hold a position in any of the aforementioned securities.
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