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They Call Them ‘High Risk Stocks’ for a Very Good Reason

high risk stocks - They Call Them ‘High Risk Stocks’ for a Very Good Reason

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Snap Inc (NYSE:SNAP) suffered a bloodbath this week, with the stock plummeting 20% in one day in the wake of a sales miss and unimpressive sales outlook. Jim Cramer even said its earnings call was like a parody of Saturday Night Live. But to be blunt, the rollercoaster shouldn’t come as a surprise. SNAP stock always has been high risk.

Emerging technologies are just about always high risk stocks because they’re kept afloat in their early days by venture capital—with the goal being that an upfront VC investment will soon spin into a profitable company.

The more promising names in the emerging tech world also raise funds by going public. In the last few years, high risk stocks in the tech world were especially appealing because risk worth investing in was hard to find elsewhere.

High Risk Is Not (Necessarily) High Reward

“Risk” might not sound appealing to someone who’s trying to grow and protect their retirement nest egg, for instance. (Indeed, I sure hope no one’s retirement was in any way riding on the performance of SNAP stock.) But risk is needed if you’re seeking outsized growth.

Younger investors are recommended to carry more high risk stocks in their portfolios since they have more time to recover losses. On top of that, private equity and hedge funds are looking for stocks that can help them beat the market and thus draw in more customers.

Everyone was looking for the “next” Facebook Inc (NASDAQ:FB) in recent years or this decade’s version of Apple Inc. (NASDAQ:AAPL) or Alphabet Inc (NASDAQ:GOOG), especially because Europe and emerging markets—where risk and growth are usually found—have been a bit of a mess.

As one stock expert put it to me in an email:

“How can you beat a 10% up year for the S&P 500 index fund unless you chase the next Uber? If everyone and their brother is making money in an index fund, where can you look to give your portfolio alpha/outperformance other than private placements?”

Individual investors needs to be aware that such factors are at play when they’re picking high risk stocks, especially in tech. Are you betting on private equity to keep bidding the stock higher? Are you a firm believe the company will soar to a profit in coming years? Have an investment thesis—and be aware of the risk a pick like SNAP stock comes with.

Not all risk looks the same. Skechers USA Inc (NYSE:SKX) also plummeted this week after its earnings call and also could easily be classified a high risk stock. Indeed, the company was downgraded because the company seems to be pursuing growth at any cost and has wild fluctuations in expenses.

That’s the kind of risk or uncertainty that could also lead to big upside. In fact, some smart high risk investors already have gone bottom-fishing and enjoyed the stock’s small rebound on Friday. Even after that, shares are trading for just 11 times forward earnings. SKX still has lots of trouble and still high risk, but the gamble could pay off.

The Bottom Line on High Risk Stocks

Investors simply need to understand what’s at stake when they pick high risk stocks. What’s the narrative? What’s the gamble? And what’s the possible pay-off? That will help investors adjust their portfolios properly, so picks like SNAP stock or SKX stock make up a good proportion of the overall pile.

As of this writing, Robert Martin did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2018/05/high-risk-stock-reason/.

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