[Editor’s note: This article is regularly updated to include the most relevant information available.]
InvestorPlace CEO Brian Hunt recently introduced the concept of “lottery stocks,” or high-risk, high-reward stocks that could double, triple, quadruple or more in a hurry. The core concept behind buying these stocks — risking a little bit of money to potentially make a lot of money, and doing so enough times so that the odds are in your favor — immediately resonated with me.
So, I constructed a portfolio of five lottery stocks in mid-November 2019. That portfolio included hyper-growth hydrogen fuel cell (HFC) maker Plug Power (NASDAQ:PLUG), beaten-up Chinese premium electric vehicle maker Nio (NYSE:NIO), left-for-dead department store retailer Stage Stores (NYSE:SSI), depressed cannabis producer Aurora Cannabis (NYSE:ACB) and disruptive online stylist platform Stitch Fix (NASDAQ:SFIX).
In the five weeks since I constructed this lottery stock portfolio, the returns have been enormous. During this stretch, the S&P 500 rose about 8%. Had you bought $1,000 worth of each one of these lottery stocks, however, you’d be up nearly 80%, or about $4,000 … in just over a month … from a mere $5,000 investment. Had you put $50,000 to work, you’d be up nearly $40,000.
Given those numbers, it’s fair to say that this lottery stock portfolio worked. In large part, that’s thanks to huge outperformance from NIO (up 120%) and SSI (up 280%).
Because of the tremendous success of this late 2019 lottery stock portfolio, I’ve decided that it’s worthwhile to construct another for 2020. Without further ado, then, it’s time to look at the best-in-class high-risk, high-reward stocks to own for the next 12 months.
Lottery Stocks to Buy for 2020: Canopy Growth (CGC)
Current Price: $20
Potential 2020 Price: $35
At the top of this list of lottery stocks positioned for a big 2020 is Canada’s biggest cannabis producer, Canopy Growth (NYSE:CGC).
The qualitative part of the bull thesis on CGC stock for 2020 is easy to follow. The headwinds which killed CGC stock in 2019 will evaporate and turn into tailwinds in 2020. Specifically, demand headwinds will turn into demand tailwinds as Canopy gets a boost from new products (vapes and edibles), sustained retail footprint expansion and enhanced logistics. Supply headwinds will also turn into supply tailwinds as Canopy has spent all of 2019 building out huge production capacity. And, U.S. legislation — which went nowhere in 2019 — will make meaningful progress in 2020, thanks to a House of Representatives committee recently passing the MORE Act.
Because of all that, the damage that CGC stock suffered in 2019 — down 30% — is nothing more than a perfect set-up for a big rebound in 2020.
How big will that rebound be? Pretty big. At this point in time, Canopy is the clear leader with the most firepower and deepest pockets, in what projects to be a massive legal cannabis market. According to my numbers, that positioning will one day enable the company to turn into a multi-billion dollar revenue company with healthy profit margins. Realistically, I think $5 in earnings per share is a doable target by 2030. Based on a forward earnings multiple of 16 (the market average multiple) and a 10% annual discount rate, that equates to a 2020 price target for CGC stock of nearly $35.
The market doesn’t see CGC stock in this same light today. That’s because of all the 2019 headwinds. But, as those headwinds turn into tailwinds into 2020, the market will start to CGC stock this way. As it does, shares will soar towards $35.
Plug Power (PLUG)
Current Price: $3
Potential 2020 Price: $5
One lottery stock in my late 2019 lottery stock portfolio which hasn’t panned out yet, but which I think can still be a big winner in 2020, is HFC maker Plug Power.
Plug Power makes HFCs, which are the “batteries” for hydrogen vehicles. To date, being the backbone of the hydrogen car market hasn’t meant much. Relative to electric vehicles, hydrogen vehicles have been unsafe, expensive and inconvenient. Still, hydrogen vehicles do have their distinct advantages over electric vehicles in terms of range and charge time. Recently, certain industries — namely, the materials handling industry — has started to understand that they can deploy hydrogen vehicles while minimizing their disadvantages by: 1) buying them in bulk, and 2) restricting their movement to a warehouse (think forklifts).
Consequently, the materials handling industry is starting to buy HFCs in bulk, which is pushing up Plug Power’s revenues by a ton. Because this is such a big industry, and because HFC penetration is still relatively low, management thinks that this trend will persist for a lot longer. So much so that they’ve issued aggressive five-year targets of $1 billion in revenue and $200 million in EBITDA.
I’m not sure Plug Power can do that. This management team has a history of over-promising and under-delivering. But, I do think that sustained robust HFC uptake in the materials handling industry will power robust revenue and profit growth over the next several years, and that 45 cents in earnings per share is achievable by 2024.
Based on an exit multiple of 16-times forward earnings and a 10% annual discount rate, that equates to a 2020 price target for PLUG stock of over $5. That’s where I think shares will trend over the next 12 months.
Current Price: $3.80
Potential 2020 Price: $7-$8
Chinese premium EV maker Nio was one of my top lottery stock picks for late 2019. Over the last three months of the year, shares have essentially tripled. Fortunately for bulls, I don’t think this big rally is over. NIO stock is one of my favorite lottery stocks for 2020, too.
NIO stock was killed throughout most of 2019 thanks to three things. First, China’s auto market slowed, as China’s entire economy slowed on the back of escalating global trade tensions. Second, NIO’s delivery volume trajectory went negative in this slowing market. Third, net losses widened as lack of sales growth converged on big expense growth.
In late 2019, Nio stock has started to bounce back because those three headwinds have reversed course. China’s auto market is now picking up steam as global trade tensions are easing. NIO’s delivery volumes grew 35% sequentially in the third quarter — thanks to a new vehicle launch — and are expected to rise another 65% in the fourth quarter. And, net loss in the third quarter narrowed year-over-year.
All of these favorable developments will continue into 2020. China’s auto market will continue to bounce back. Nio’s positioning in that market will continue to improve thanks to yet another new vehicle launch, new battery pack launches and a refresh of an old vehicle. Cost-cutting initiatives will continue to bear fruit and converge on renewed sales ramp to drive meaningful margin expansion and healthy loss contraction.
All the important financial and fundamental trends should move in NIO’s favor in 2020. Assuming they do, my math indicates that this stock could take out the $7-$8 levels next year.
Stage Stores (SSI)
Current Price: $8.35
Potential 2020 Price: $10
Department store operator Stage Stores, is a stock which has increased more than 15-fold over the past few months. But I still think that SSI stock has more fuel in the tank to run even higher in 2020.
The story at Stage Stores is quite simple. For most of the decade, Stage Stores was your typical, antiquated department store operator that was losing the retail game. Along the way, Stage Stores acquired off-price department store operator Gordmans. Nobody blinked when it happened. But, a few years later, Stage Stores management noticed that Gordmans locations were consistently and meaningfully outperforming their Stage Stores locations.
So, on the brink of collapse, SSI management proposed something radical. They are now converting all the full-price Stage Stores locations into Gordmans locations.
This transition started in 2019. It’s worked beautifully so far. The company has rattled off back-to-back quarters of 15%-plus comparable sales growth. The best part? This transition is just getting started. In 2019, the company converted less than 90 full-price stores into off-price ones. In 2020, it will convert more than 500.
Essentially, then, this transformation into a successful, growing, profitable off-price retailer is in its first few innings for Stage Stores. As the transition gains mainstream traction in 2020, shares will continue to power higher. My $10 price target is based on my assumption that sales stabilization and margin improvement will drive earnings per share towards 70 cents by 2025. Based on a retail sector average 20-times forward earnings multiple and a 10% discount rate, that equates to a 2020 price target of nearly $10.
As of this writing, Luke Lango was long PLUG, NIO, SFIX and CGC.