In late September, I wrote a gallery on InvestorPlace.com about “lottery stocks”, or high-risk, high-reward stocks with huge long-term upside potential.
The theme of the gallery was very simple. It was reiterated by our very own CEO, Brian Hunt, in his October piece on lottery stocks. Investors of all shapes and sizes would be wise to invest some money into a basket of these high-risk, high-reward lottery stocks because doing so is all about risking a tiny bit of money for the shot of making a fortune.
Sure, the actual lottery is all about the same thing. Buy a scratch ticket for a few bucks. Have a 0.0001% chance of winning the jackpot. Still, no one would consider this a financially wise decision because the odds of winning are so small.
But, investing in lottery stocks has much more favorable odds … if you do the leg work of figuring out which lottery stocks have the best chance of turning into multi-baggers in the long run.
I’ve done that work for you. I’ve identified a handful of lottery stocks that have visible and realistic pathways to 200%-plus upside over the next few years. Are they still risky? Of course. But, the risks here are fully compensated by the possibility of huge long term returns.
This column examines five stocks deemed worth of the term “lottery stocks,” each with a very realistic chance to triple over the next few years.
Lottery Stocks That Could Triple: Plug Power (PLUG)
Current Price: $3.50
Potential Future Price: $12
One lottery stock that I’m particularly bullish on is hydrogen fuel cell, or HFC, maker Plug Power (NASDAQ:PLUG), because this company has a visible opportunity to grow by leaps and bounds over the next few years if hydrogen become a viable second fiddle to electricity in the alternative fuels market — and that very well could happen.
In the alternative fuels market, there are basically two core and competing technologies: hydrogen and electricity. You’ve heard all about electricity because, at present, it’s much better than hydrogen. That is, it’s safer, it’s cheaper, and it’s supported by better infrastructure.
But, hydrogen tech has it’s advantages. The two big ones? Shorter recharge times and longer range, meaning that hydrogen cars actually save consumers a ton of time. Some consumers really value time. For those that do, hydrogen could become a more attractive alternative fuel option than electricity, especially as hydrogen safety continues to go up and HFC costs continue to come down (both of which are already happening).
Given that, here’s the bull thesis on PLUG stock. Plug Power is at the epicenter of the HFC market. It’s only an $800 million company. Tesla (NASADQ:TSLA), the world’s leading electric car company, has a $65 billion market cap. Thus, even if HFC tech only gets to a tenth the popularity of electric cars at scale, one could still very reasonably argue that Plug Power would warrant a market cap the tenth the size of Tesla, or about $6.5 billion, in the future.
Indeed, the numbers do work out like that. Plug Power management expects expansion of HFC adoption in core commercial markets to drive big growth over the next few years. Specifically, management is pointing towards $1 billion in revenue by 2024, with $200 million in EBITDA. Is that possible? Yes. If Plug Power does hit those aggressive targets, the numbers shake out for the company to net about $0.50 in EPS by 2024, and likely somewhere around $0.60 in EPS by 2025.
Apply a growth stock average 20-times forward multiple to that $0.60 EPS base in 2025. That implies a 2024 price target of $12, which means that in an “everything goes right” scenario, PLUG stock could rally more than 200% from here over the next few years.
Current Price: $1.80
Potential Future Price: $14
Often dubbed the “Tesla of China”, Chinese luxury electric vehicle maker NIO (NASDAQ:NIO) has a realistic opportunity to turn secular EV and self-driving trends into big growth for the company over the next few years.
The story on NIO is pretty straightforward. This company was supposed to be just like Tesla. Start with one premium EV. Sell a bunch of those models. Establish strong brand equity. Leverage that strong brand equity to keep launching new, high-demand EV models. Gradually gain share in the huge Chinese EV market, and leverage scale to produce huge profits.
Things haven’t played out like they were supposed to. NIO started off with a bang, but over the past few quarters, delivery volumes have come tumbling lower, even amid a new car launch, mostly because: 1) there are simply too many EV companies in China, and 2) the EV market in China slowed considerably in 2019.
But, given that this company has crafted a niche for itself in the luxury EV market and that the company just announced a strategic collaboration with Intel’s (NASDAQ:INTC) Mobileye unit for the development of self-driving cars, there is a possibility that NIO regains its groove over the next few years.
Let’s say they do. The numbers here work out so that China’s EV market will likely measure around 7 million to 10 million cars by 2030. NIO could control about 5% of the market, implying around 375,000 EV deliveries in 2030. Assuming a $50,000 ASP and auto average 10% operating margins, we could easily be looking at $1.40 in earnings per share. Based on a market-average 16-times forward multiple and 10% annual discount rate, that implies a 2024 price target for NIO stock of $14.
Stage Stores (SSI)
Current Price: $2.20
Potential Future Price: $9.50
Struggling department store operator Stage Stores (NYSE:SSI) ostensibly looks like just another retailer that is being made irrelevant by Amazon (NASDAQ:AMZN). But, underneath the hood, Stages Stores is making some aggressive changes, and if they work, SSI stock could be a multi-bagger in the long run.
Long story short, Stage Stores has been killed by online retail competition over the past few years. Comparable sales, revenues, and margins have all dropped. Profits have been wiped out. SSI stock has plummeted, weighed by not just an operational crash but also by a heavily levered balance sheet.
But, management is finally doing something to right the ship. Specifically, Stages Stores owns both full-price and off-price stores. The off-price stores are doing much better than the full-price ones. Management is now in the process of converting all of its full-price stores, to off-price stores. The result? Stage Stores could look like a mini TJX (NYSE:TJX) or Ross Stores (NASDAQ:ROST) within a few years.
Those off-price retail giants have stable sales bases and margins. If SSI’s off-price transition works out, that’s exactly what should happen. Sales will stabilize, and margins will peek back into positive territory. Making conservative assumptions on both fronts (sales stabilize around their current $1.5 billion base and operating margins move towards 2.5%), then Stage Stores could realistically net about $0.50 in earnings per share by 2025.
Based on an apparel retail sector-average 19-times forward earnings multiple, that implies a 2024 price target for SSI stock of $9.50.
Current Price: $2.30
Potential Future Price: $16
The cannabis market has been under siege recently, amid crumbling demand trends and widening losses. Canadian cannabis producer Aurora (NYSE:ACB) hasn’t been an exception to the trend. But, in the long run, Aurora still looks positioned to be an important player in a huge market, and ACB stock is way undervalued today if that reality comes to fruition.
There’s a lot going wrong in the cannabis market today. Demand is staying in the black market, because the legal market is having trouble keeping up with black market prices (taxes and fees make the legal market cost base way higher than the black market cost base). Legal producers are having to discount their cannabis to compete. The result? Slowing demand and falling margins, a troublesome combination for what was supposed to be a growth industry.
But, the core fundamentals here remain favorable. That is, data shows that not only is cannabis consumption on the up and up, but also that young consumers like to smoke cannabis almost as much as they like to drink alcohol. The implication? Once the legal market figures out logistics and pricing, and out-muscles the black market, the legal cannabis market will be very, very big in a decade — like $200 billion big.
Aurora is currently one of the biggest players in the cannabis world. More competition over the next several years will bring Aurora’s market share lower. Ultimately, though, this company should be able to nab 5% share in the $200 billion cannabis market, implying about $10 billion in revenues by 2030.
ACB’s gross margins are already at 60%. Opex rates should fall toward more normal 30% levels with scale, eventually resulting in 30% operating margins. That’s about $3 billion in operating profits. Take out 20% for taxes. Assume 1.5 billion shares out. Use a price-earnings multiple of 16, which is average for the market. All that math gets you to a 2029 price target for ACB stock of over $25. Discounted back by 10% per year, that equates to a 2024 price target of nearly $16.
Stitch Fix (SFIX)
Current Price: $20
Potential Future Price: $64
Last, but not least, on this list of potential lottery stocks that could triple is personalized styling service Stitch Fix (NASDAQ:SFIX), a company which could change the entire apparel retail model, and in so doing, become a multi-bagger stock over the next few years.
Apparel retail today works like this. You go in a store or to a website. You peruse apparel in different categories, adding some to your checkout cart as you go. At the end of the shopping trip, you pay for the stuff you liked and wanted.
Seems simple, right? Sure. But, Stitch Fix is in the game of making it even more simple. Imagine if you could just sign up for a service that had a bunch of personalized stylists, and those personalized stylists did all the shopping for you. All you have to do is answer a few questions, and sit back and wait for the clothes to arrive. Better than that, if you don’t like what the stylists picked out, you can send it right back.
That’s the Stitch Fix model. They are taking the thinking out of shopping so it becomes as easy as just answering a few questions. Sure, it’s not for everyone. Some people really enjoy going into stores and doing their own shopping. But, this model unequivocally saves time, and it’s also professionally curated, so for us design-challenged folks, it yields better results, too.
The implication? It seems inevitable that Stitch Fix’s reach across the apparel retail landscape will only grow over time. This is a huge, huge market — $430 billion in the U.S. and United Kingdom alone. Stitch Fix is a small company — only $1.6 billion in revenue over the last twelve months. Thus, the opportunity for further growth here is tremendous.
All things considered, Stitch Fix should grow sales at a 20% pace over the next several years. During that stretch, operating margins should improve thanks to increased scale. Assuming so, then this company could be looking at $3.20 in earnings per share by 2025.
Based on a consumer discretionary sector-average 20-times forward earnings multiple, that equates to a 2024 price target for SFIX stock of $64 — up more than three-fold from today’s $20 price tag.
As of this writing, Luke Lango was long PLUG, TSLA, INTC, RJX and SFIX.