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3 High-Risk, High-Return Stocks to Buy

Investing in stocks requires risk and most often, the higher the risk the higher the rewards. In this episode, learn how to pick high-risk yet high-return stocks to invest.

Hey Bow Tie Nation, Joseph Hogue here with the Let’s Talk Money channel and anyone investing in stocks for long enough, you know about that risk-return tradeoff. The idea that to book those higher returns, you have to invest in the riskier stocks.

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Investing in Stocks Has Its Own Risks

Stocks like GameStop that can surge 20-fold in a month or lose 85% just as fast, there is no return without the risk.

But that doesn’t mean you have to take too much risk to find great stocks or that you can’t tilt the odds in your favor for higher return on lower risk.

In this video, I’ll show you how to find high return stocks and how to separate the risky from the just plain crazy. We’ll put together a screener for stocks to buy that will grow your portfolio but won’t make you lose sleep. Then I’ll reveal three high return stocks that may be risky but are still good investments.

We’ll be using Stockcard.io to start our search. I’ll leave a link to Stockcard in the video description. Click through and then go to Portfolios in the top menu, you’ll find the Bow Tie Nation portfolio in this Stock Picks section. It’s free to follow and you’ll get email notifications whenever I buy or sell from the portfolio.

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We’ll start on Stockcard and if you go to the dashboard, you’ll see these Featured Collections which are interesting groups of stocks around different themes. This was actually the inspiration for the video, this Stocks for Risk Takers collection, and if we click through, we see there are 222 stocks to watch in the group.

How to Find High-Risk Stocks That Give High Returns

Now the criteria for that risk-takers stock list is companies under $10 billion market cap. That filters for companies with a mid-cap market size or lower and that’s typical of a high-risk, high-return screener. Smaller companies tend to grow faster. They can focus better on a portion of the market and it’s a lot easier to grow sales 20% or more on a base of $5 million in sales rather than $500 million.

The screen also filters for companies with revenue growth of 5% or more on an annual and three-year basis. And I’d like to see that a little higher. Five percent isn’t much for sales growth and I usually want to see fifteen or 20% growth on those high return stocks.

This filter for a current ratio above 1.0 and for balance sheet cash above annual operating expenses is a great one and helps to screen out the really risky stocks. The current ratio is a company’s current assets, so the things it can quickly turn into cash, relative to near-term liabilities it needs to pay. It’s a good measure of short-term liquidity for a company and how well it can cover those debts.

So having a current ratio above 1.0 means the company has enough of those cash-like assets to cover all its near-term obligations and then cash greater than operating expenses means it can go even further, use its cash reserves to pay all the upcoming business costs.

But now if I want to narrow that list, to find those with a little less risk and because I really don’t want to research 222 stocks, I can start a new screen. Then I can search for the risk takers stock collection and add it to the screen so we start with those criteria.

Now I’m just going to filter for a few more fundamentals to narrow the list. I’ll filter for stocks with positive sales growth for those growing the top-line. I also want to screen for those with a record of positive earnings per share. Finally, I’ll also narrow it down to Micro-cap and Small-cap companies, those with a market size between $50 million to $2 billion, and apply these filters.

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And here we see that narrows our stocks list to just 85 companies to start from.

And this is mostly just to tighten up the criteria. By filtering for positive sales and earnings trends, I narrow the list to companies that have proven they can perform against their peers. Even if you’re investing in riskier stocks, as long as the company is growing sales and profits, you know the stock price will increase over time.

Narrowing our list for micro- and small-cap stocks filters out those super small companies, the riskiest of the risky, but then also keeps us in small cap companies with the flexibility to outperform.

3 High-Risk Yet High-Return Stocks to Buy While the Market is Recovering

And first on our list isn’t that risky but still offers a solid return, $1.26 billion Netgear Inc., ticker NTGR.

Netgear is the leader in home internet connections with more than 40% of the U.S. home WiFi market and 55% of the retail switch market. Basically, if you’ve got a WiFi router or other equipment at home, it’s probably Netgear.

Now the company has been around since 1996 but new opportunities in networking could help it refresh that new company growth. Besides that lock on the home market, I really like Netgear for its subscription cloud-service which gives it a recurring revenue stream on 437,000 users.

The company actually benefited from the lockdowns as everyone rushed out to update their home WiFi connections. Netgear booked 26% sales growth last year and is expected to hit $1.34 billion in revenue this year.

That’s slower growth but still solid at 7% over the year and the rest of the financials look great. Netgear has improved it’s operating profitability from 6.4% in 2019 to 8.25% last year, so producing more profits on those sales. Balance sheet cash has grown more than $170 million to $370 million with only $33 million in debt in the most recent quarter. That’s almost a third of the value of the shares, backed by cash.

I think the company continues to book strong sales growth in a boom on small business and home office demand for connectivity and that giant cash pile could be the big surprise this year. Nearly $400 million in cash, the company could either return it to shareholders, make an acquisition or become a takeover target on that cash alone.

Shares are trading at just 0.94-times on a price-to-sales basis and the average analyst target of $49.70 a share would mean a 20% upside from here.

Next on our list is more that high-risk, high-return theme with eGain Corporation, ticker EGAN.

eGain is a Software as a Service provider in customer service and messaging applications with chat assistance, email and social. It’s got a strong driver in AI for its applications and this is another of those recurring subscription business models, so revenue growth and stability.

Total revenue was up 8% on a year-over-year basis in the last quarter but up 14% in its core SaaS segment. The company is expected to reach $77 million in sales this year, and remember this is only a $340 million company, so that’s something you don’t see often, a small-cap company producing that kind of revenue.

It’s also another one with a big cash stockpile, over $50 million in net cash, 15% of the market cap backed by cash, and the company is a constant innovator. eGain launched its virtual financial coach product in March, an AI powered engagement service now piloting at 25 credit unions.

Shares trade for a price of 4.4-times sales, fairly low for a software provider, and sport a 17% upside to the average analyst target of $12.86 each but I think this one goes much higher.

Another stock in a high-growth industry, $1.24 billion nLight Inc, ticker LASR.

nLight develops semiconductor and fiber lasers for multiple end markets including industrial use, microfabrication as well as aerospace and defense. Revenue was up 26% last year and is expected to reach $270 million this year for growth of 22% and that’s well diversified across all three markets.

And you know by now, I’m a sucker for a strong balance sheet. nLight has more than $185 million in cash against just $18.6 million in debt. So like the others, a net cash position that amounts to a sizeable chunk of the stock’s value.

For catalysts on this one, the market for semiconductors is booming and the company grew sales in its microfabrication unit by 47% last quarter. It’s got over 500 issued and pending patents in a high-growth market and a cash-rich balance sheet…I would not be at all surprised if this becomes a takeover target.

Shares are trading for a price of 5.1-times sales, again not at all high for a company booking that kind of sales growth. There’s an 18% upside to the $34 average analyst target but I like it up to $40 over the next year and higher beyond that.

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