Keep an eye on these seven boom or bust risky stocks.
The best investors in the world have an extremely keen sense of the risk-reward trade-off. If you could boil down one trait that makes great investors so successful it would be the ability to maximize the ratio of reward to risk. That said, sometimes very risky stocks can still offer impressive potential returns by comparison. Many of the following stocks won’t be great fits for conservative retirement investors, but rather more aggressive investors with longer time horizons. For example, some of the stocks on this list have upcoming binary events — important catalysts on the horizon that will either cause the stock to jump or fall precipitously. Here are seven boom or bust risky stocks to watch.
Tilray (ticker: TLRY)
Tilray, like many of the marijuana stocks, is a quintessentially risky boom or bust play. The Canadian marijuana company was primed to be one of the major beneficiaries when Canada legalized recreational marijuana in 2018. And there’s no doubt that was a major boon to Tilray’s top line; revenue soared 110% that year compared to the prior year and increased 287% in 2019, as sales soared from $12.6 million in 2016 to $167 million for full-year 2020 revenue. Unfortunately, TLRY’s losses have expanded with revenues, and the company lost $321 million on $167 million in revenue in 2019. As for the potential to boom, the stock is down 65% year to date and may benefit from a speculative run-up if former Vice President Joe Biden — the more cannabis-friendly of the two major presidential candidates — wins in November.
Virgin Galactic Holdings (SPCE)
One of the first prominent high-flying SPACs, or special purpose acquisition companies, is Virgin Galactic, the first publicly traded commercial space company. It has virtually no sales — SPCE had $4 million in revenue in 2019, yet is valued by the market at nearly $5 billion. The company is unprofitable and is expected to remain in the red in 2021. That said, many analysts think space tourism will be a lucrative industry at some point in the 2020s. An average target price of $25.75 for SPCE represents 25% upside from current levels. Virgin Galactic is ahead of the pack in its industry, but what makes it a risky stock to watch is its valuation, uncertain margins in the years ahead and a number of potential competitors, including SpaceX and Boeing (BA), among others.
Dave & Buster’s Entertainment (PLAY)
Entertainment and dining chain Dave & Buster’s is undeniably a risky stock, considering it warned shareholders as recently as September that it may have to file for bankruptcy if it can’t renegotiate deals with its creditors. Another victim of the pandemic and the decline in U.S. restaurants this year, shares are down more than 60% year to date. That said, PLAY could also be in for a rip-roaring comeback if it works its debt situation out and the economy continues to reopen. Within 24 hours of Dave & Buster’s warning to the market that bankruptcy could eventually be on the table, two prominent Wall Street research firms actually upgraded the stock, giving it around $20 per share as a price target, or almost 30% upside from today’s levels. If PLAY can wait this situation out, it could be poised for a major rebound; if not, D&B’s is a legitimate bankruptcy contender.
Occidental Petroleum Corp. (OXY)
U.S. oil and gas producer Occidental Petroleum is, to be sure, a victim of the times. Plunging oil prices driven by a global supply glut, the inability of Russia and OPEC to work together on production cuts, and an unprecedented demand shock amid the pandemic — all factors out of OXY’s control — have visited chaos on even the largest U.S. producers. Down 74% in 2020, Occidental has a troubled balance sheet and a debt-equity ratio of 2.65. If the energy market continues its tailspin, it’s likely OXY stock will, too. On the other hand, Occidental, valued at nearly $10 billion, recently paid Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) a $200 million dividend on Berkshire’s preferred shares in cash rather than stock, signaling confidence. Any sustained “V-shaped” recovery would likely be great for commodity prices and oil, and therefore a big boost to OXY stock.
Small biotech stocks are the primary residence of binary events. Oftentimes a company with no revenue will have a few drugs in development, with all the stock’s value tied to the approval and commercial success of those drugs. That’s a good description of Lipocine, which is worth around $100 million based purely on its pipeline potential (trailing revenue is immaterial at less than $170,000). LPCN’s leading candidate is Tlando, an oral testosterone replacement therapy. Having already gone through years of clinical trials, the U.S. Food and Drug Administration is expected to rule on the drug’s approval within the coming weeks, and some analysts believe Tlando could bring peak revenue of $50 million annually.
Alaska Air Group (ALK)
All U.S. airlines are in a rather tough spot this year, and Alaska Air finds itself among the many risky stocks to watch in this area. Down about 43% in 2020, ALK and other airlines are lobbying Congress for more federal aid in order to keep the commercial flight industry afloat — and prevent widespread layoffs as demand plunges. Passenger revenue last quarter was down 85% compared with the same time last year, as business and commercial passengers have shied away from airplanes, an early spreader of the virus. That said, ALK’s balance sheet is fairly strong nonetheless, the company remains profitable, and if the virus begins to fade from society, the $4.7 billion ALK could take off yet again. Revenue passenger miles, or the number of passengers multiplied by miles flown, fell 87.7% in the second quarter, which is rough, but it’s not as bad as American Airlines’ (AAL) 89.6% decline or Delta Air Lines’ (DAL) 94% drop.
The Children’s Place (PLCE)
Last but not least, children’s clothing retailer The Children’s Place rounds out the list of risky stocks to watch. Shares have lost nearly 60% this year as the pandemic forced temporary store closures and virtual learning struck at the back-to-school season. At the same time, prudent cost reductions — the company aims to close 300 stores by the end of fiscal 2021 (The Children’s Place currently has 920 locations) — alongside a huge boost in digital sales (up 118% last quarter) offer some light at the end of the tunnel. Although 2020 will doubtlessly be an awful year, analysts expect PLCE to return to convincing profitability in 2021. If the pandemic continues to hold back the economy for longer than is currently expected, PLCE will continue to struggle. But the stock trades for just 12 times forward earnings, offering compelling potential if the pandemic’s impact wanes as expected in 2021.
Seven stocks with great risk and high potential reward:
— Tilray (TLRY)
— Virgin Galactic Holdings (SPCE)
— Dave & Buster’s Entertainment (PLAY)
— Occidental Petroleum Corp. (OXY)
— Lipocine (LPCN)
— Alaska Air Group (ALK)
— The Children’s Place (PLCE)
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