It seems like investors cannot get enough of risky stocks. Of course, the main focus has been on fast-growing tech plays. Then there has been the huge demand for IPOs as well as SPACs (special purpose acquisition companies). It really does seem like the markets are harking back to the dot-com era of the late 1990s.
But amongst this bullishness, there are rising concerns from top investors. Let’s face it, booms always fizzle out. And this one will be no different.
However, with the large amount of fiscal stimulus and the accommodative monetary policy, the good times will probably last for awhile longer. So in this environment, which of the risky stocks look interesting right now? Well, let’s take a look at seven:
- Palantir Technologies (NYSE:PLTR)
- Baidu (NASDAQ:BIDU)
- Marathon Oil (NYSE:MRO)
- HEXO (NYSE:HEXO)
- Zoom Video (NASDAQ:ZM)
- Moderna (NASDAQ:MRNA)
- Twitter (NYSE:TWTR)
Risky Stocks: Palantir Technologies (PLTR)
Since coming public in late September, Palantir Technologies has been on a massive bull run. PLTR stock has gone from $7.25 to $39 recently. The market capitalization is now at a hefty $50 billion.
Note that Wall Street is skeptical of this valuation. The average price target is $17, which assumes more than 40% downside from current levels.
But I think the bearishness may not be warranted. The fact is that Palantir Technologies has fairly unique advantages in the fast-growing AI market. Founded in 2003, the company has become a must-have for governments to process huge amounts of data, such as to spot terrorists and better manage a battlefield.
Palantir also leveraged this expertise into the commercial world. For example, the company has been able to help design systems for the novel coronavirus pandemic.
Growth has been supercharged. In the latest quarters, revenues shot up by 52% to $289.4 million.
But the market is massive. According to Palantir, it is a whopping $119 billion. So Palantir has more then enough runway to continue its growth ramp.
China stocks have great potential. But there are also the political risks, such as with trade actions and even the limitations of trading in the U.S. equities markets.
Although, with the incoming Biden administration, there may be a normalization of relations. Another positive factor is that China is a market that is becoming more important for U.S. companies, like Starbucks (NASDAQ:SBUX) and even Tesla (NASDAQ:TSLA).
As a result, there are some interesting plays in the market. And one is Baidu. Founded more than 20 years ago, the company is the dominant online search platform in China.
True, the market is saturated and there is emerging competition. Yet Baidu has been plowing large amounts of capital in R&D.
Because of this, the company is now one of top players in the autonomous driving category. At the heart of this is its open source Apollo software, which allows for sophisticated computer vision. There are more than 130 partners, including Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA).
What’s more, Baidu moved into different lucrative markets, such as for robotaxis. There are also signs that the company will develop its own autonomous cars.
While BIDU stock has rallied, the shares are still trading at a reasonable valuation, with the forward price-to-earnings ratio at 20X. The company also increased its share buyback program to $4.5 billion.
Risky Stocks: Marathon Oil (MRO)
The energy sector got hit particularly hard with the Covid-19 pandemic. But even before this, the industry was facing tough issues. For example, there was a global oversupply because of the aggressive production of the shale companies.
But interestingly enough, Wall Street is starting to get more bullish on oil stocks. It certainly helps that the price of crude has been fairly stable and the supply-and-demand dynamics improved.
In fact, some of the gains for energy stocks looked more like those of red-hot tech startups! Just look at Marathon Oil. During the past three months or so, the shares for MRO nearly doubled.
But this might be a warmup. With a much more streamlined cost structure, there is considerable operating leverage. So if prices for crude continue to improve, there could be a nice jump in profits. Interestingly enough, this appears to have been the case with the latest quarter, in which cash flows came to $180 million, up from negative cash flows of $43 million during the prior period. Note that the company has a break-even point of $35 per barrel on average for West Texas Intermediate (WTI).
The company also reinstated its dividend at 3 cents per share. Yes, it’s an encouraging sign that things are on the mend for MRO stock.
The cannabis sector has seen quite a few risky stocks. During the past few years, there has been a major boom and bust. For the most part, the Canadian market had gotten saturated and there were problems with unregulated operators in the market.
But now it looks like the industry is starting to get its footing.
Then what stocks look interesting? One is HEXO. In the latest quarter, revenue soared by 114% to $41.3 million and there was a 14% quarter-over-quarter increase. The company saw strength across all its key markets.
A key to HEXO stock is the strategic partnership with Molson Coors Beverage (NYSE:TAP). The deal allowed the company to get much traction with distribution. Then there has been the access to marketing capabilities.
The relationship with Molson Coors is still in the early phases. Thus, for HEXO, there is likely to be substantial long-term growth.
Risky Stocks: Zoom Video Communications (ZM)
Since hitting a high of $559 in mid-October, Zoom Video Communications stock dropped to $378. Now the company is still up substantially during the past year. Consider that the low was $70.
But some investors are getting concerned. Yes, part of this is about the valuation. Then there is the worry about how there may be less use of Zoom as the vaccines for the Covid-19 pandemic bring about normalization.
However, when it comes to ZM stock, I think the issues are not as bad as they may seem. The reality is that remote working is likely to remain a big factor in the business world. There will also be continued reliance on video conferencing for sales activities.
Besides, Zoom has become the top-of-mind brand for the category, which means substantial free marketing. The cash flows are substantial and the top-line is growing at triple digits.
Wall Street analysts also remain bullish on ZM stock as the average price target is $469, which assumes 24% upside from recent levels.
For some investors, Moderna does look like a risky stock because the valuation appears to have already factored in the impact of the Covid-19 vaccine. Lately MRNA stock has come under pressure. Since early December, the shares have gone from $156 to $133.
But then again, this actually looks like a good entry point for long-term investors. If anything, the impact of the Covid-19 vaccines may be underestimated. According to Goldman Sachs (NYSE:GS), the total spending is estimated at $13 billion and it’s a whopping $100 billion for Evercore ISI.
But Moderna’s expertise in messenger RNA is likely to be a huge advantage for the development of other vaccines and treatments. For example, the company is creating treatments for cytomegalovirus (CMV), Zika, Epstein-Barr virus and melanoma.
Moreover, with the large cash flows, the company will have the resources to invest aggressively in R&D and acquisitions – helping to keep up the growth rate for the long haul.
Risky Stocks: Twitter (TWTR)
Since the Twitter permanently suspended former President Donald Trump from its service, TWTR stock has been in the downtrend. The shares are off about 15%.
While there will probably be short-term fallout – which include some conservatives abandoning the platform – the prospects for the company still look good. The company’s service is unique and durable. Note that other companies like Facebook (NASDAQ:FB) have tried to enter the market for social-based news but with little success. Actually, Trump’s avid use of the service during his presidency actually helped reinforce its competitive advantages – and this impact should be long lasting.
Of course, Twitter is more than just about politics. The platform remains critically important for celebrities and athletes. Thus, there are wide-scale opportunities for advertising.
Among social media stocks, TWTR also sports a fairly reasonable valuation. The shares trade at about 21 times forward earnings.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.