[Editor’s note: This story was originally published August 2017. It has since been republished and updated to reflect new information, but these stocks to buy remain risky bets.]
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.
High-Risk Stocks to Buy: Teva Pharmaceutical (TEVA)
Teva Pharmaceutical (NYSE:TEVA) is doing a lot better this year — up just shy of 20%.
Yet, Teva has too much debt and too little growth. Its key drug, Copaxone, which treats multiple sclerosis, is facing generic competition from Mylan (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.
While pressure has persisted on generic drugs, but it won’t last forever.
The company has sold assets to clean up its balance sheet, which has de-risked the story somewhat. In my opinion, Teva is a better version of Valeant, but with an easier path back to normalcy.
It’s a risky path, but if it works TEVA could gain another 20%-plus simply by reaching a higher multiple and removing bankruptcy fears.
High-Risk Stocks to Buy: Scientific Games Corp (SGMS)
The story already has played out somewhat at Scientific Games (NASDAQ:SGMS), which has corrected 50% so far this year. But the growth story isn’t necessarily over.
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 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 considering 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.
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 last year, it’s been nothing but downhill. CHK now trades at a seven-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 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.
High-Risk Stocks to Buy: Splunk (SPLK)
Splunk (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 (NASDAQ:CSCO) cited as a potential buyer in June and International Business Machines (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.
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 (NYSE:SFL) might be the exception to the rule.
There’s likely to be some near-term volatility, as Seadrill (NYSE:SDRL) files for bankruptcy in the coming weeks. And Ship Finance’s dividend, which currently yields 11%, 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.
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 (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, which analysts see surging near 30%.
That in turn, would suggest likely significant upside from current levels for GWPH stock.
High-Risk Stocks to Buy: Canadian Solar (CSIQ)
Considering 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 (NASDAQ:CSIQ) actually haven’t done all that well. SolarCity had to be rescued by Tesla (NASDAQ:TSLA). First Solar (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.
High-Risk Stocks to Buy: Superior Industries International (SUP)
Superior Industries International (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. 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.
High-Risk Stocks to Buy: Chegg (CHGG)
Chegg (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 did not hold a position in any of the aforementioned securities.