In this piece, we will take a look at the 10 high risk high reward growth stocks to buy.
When it comes to making money on the stock market, most investors are typically attracted to growth stocks. Growth stocks are primarily identified by the price to earnings ratio (P/E) for those firms that are profitable. A higher P/E ratio compared to the industry multiple means that investors have already priced in future growth into the share price to an extent and any surpassing of investor expectations sees the share price appreciate. Since some firms, particularly those in the software as a service (SaaS) industry, reinvest their revenue into growth, their earnings are often negative. Subsequently, the growth potential of these stocks is evaluated by their EV/Sales ratio, and you can find more details by reading 11 Best Cloud Stocks to Buy According to Analysts.
However, while these metrics are important for evaluating stocks, they often do not cover the riskiest stocks that promise the highest returns. In theory, stocks with the lowest prices often carry a higher potential of 10x or even 100x gains. This is because their low prices and small market size both have a substantially larger potential for growth when compared to bigger firms. These returns typically materialize over the course of several decades.
For instance, after accounting for their stock splits, the three most valuable firms in the world were trading at $0.10, $0.11, and $0.04, respectively. In today’s post inflationary terms, this means that their shares started to trade at $0.19, $0.21, and $0.08 in the same order. As a result, these bottom barrel stocks at the time of their IPOs, have delivered 183,916%, 401,600%, and 256,975% in returns through price appreciation after their stock market debut.
In short, these 1,500x+ returns through price appreciations are what drive countless investors to flock to the stock market daily. Yet, these returns also mean that investors, particularly inexperienced ones or those on the retail side, fall victim to scams. In fact, along with offering the highest potential for returns, micro cap stocks are also the ones with the greatest number of scams. For instance, one common way in which stock brokerages target unsuspecting retail investors is through a chop stock. This practice isn’t illegal, but it involves the seller withholding key information from the buyer. A chop stock is a stock that a brokerage buys from a large shareholder at a deep discount and then sells to unwary buyers at market price which creates a conflict of interest for the selling party as it stands to significantly profit from any sale.
While there are no surefire ways to spot a chop stock, an investor should be on the lookout for stocks that their brokerages (or others) are selling at slight or medium discounts to the market price, and in case of the brokerages, not disclosing the commission made from the sale. The mantra is simple: If it’s too good to be true, it generally is. While all this sounds nefarious, it isn’t the only legal way that gullible investors are exploited on the stock market.
In fact, one of the more common and legal ways through which investors, particularly in smaller companies, are harmed is additional share issues by firms who are struggling to raise capital through profits or debt financing. Share sales, even though they provide investors an opportunity to profit via price appreciations, are less riskier than debt issues since in case a company becomes a gone concern, debt holders are required to be paid back first. Naturally, firms prefer them for these reasons, but the more shares are issued, the lower the value of existing equity becomes. Consequently, you are likely to see micro cap stocks in particular drop in prices after management announces additional equity raises.
Additionally, firms that are struggling operationally try to shore up their corresponding stock devaluation through reverse stock splits. These reduce the number of shares outstanding but also end up providing unwary investors with a false sense of comfort in seeing the value of their investments increase. Since the share price appreciation is unrelated to business fundamentals, it carries the risk of depreciation in the future if the firm fails to reverse poor performance. This fact is also backed by research from the University of Texas and Lamar University. After analyzing 1,206 reverse stock splits between 1995 and 2011, the research demonstrates that less than half, 500 or 41%, of the firms, were able to continue operations for five years or longer after the reverse split. Out of the other 59%, a whopping 80% were de listed from exchanges less than five years after the reverse split, for reasons that include bankruptcy. The remaining 20% were acquired, and for this subset, the median survival time post split was just 20.9 months.
There are some tips that an investor can use to avoid stock scams. For instance, one should never fall for a sense of urgency created by the seller, believe only in verifiable and raw numbers as opposed to ‘testimonials’ that promise quick riches, ensure that anyone selling an investment is a licensed finance professional, be on the lookout for effort free ways to quickly make massive amounts of money, and follow the principle of ‘if it’s too good to be true, it generally isn’t.’ Other warning signs of micro cap stock fraud include stocks of shell companies with little to no operations, heavy promotion of the stock as opposed to the actual business, sudden and rapid jumps in share prices and trading volume, and trading suspensions by the SEC.
Investment research websites, newsletters, emails, and even newspapers can all pitch micro cap stock scams. So just because the source appears credible doesn’t mean the underlying stock is as well. Finally, research is a non negotiable for any investment decision, and the SEC has listed several ways to conduct research. Yet, just because a firm regularly releases information doesn’t mean that it’s ripe for investment solely because of this fact.
With these details in mind, let’s take a look at some high risk high reward growth stocks to buy.
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Our Methodology
To make our list of the high risk high reward growth stocks to buy, we first made a list of 15 stocks that the financial media is recommending. Then, they were ranked by the number of hedge funds that had bought the shares in Q2 2024 and the top stocks were selected.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
10. Bitfarms Ltd. (NASDAQ:BITF)
Number of Hedge Fund Holders In Q2 2024: 16
Bitfarms Ltd. (NASDAQ:BITF) is a Canadian Bitcoin miner with operations in the US, Canada, Argentina, and other countries. The firm is heavily exposed to Bitcoin price and demand, as 98% of its revenue comes through Bitcoin mining. This makes Bitfarms Ltd. (NASDAQ:BITF) a classic high risk and high growth stock as the firm can deliver returns if Bitcoin’s acceptability and popularity grow worldwide. Similarly, it can face significant headwinds should regulatory scrutiny of the cryptocurrency grow or if economic tailwinds force investors to divest their risky Bitcoin holdings and move into safe haven assets such as gold and the US dollar. Bitfarms Ltd. (NASDAQ:BITF)’s share price in 2024 has fared much worse than Bitcoin though. The stock is down 37% year to date even though Bitcoin price is up by 25%. Due to its Bitcoin exposure, the keys to Bitfarms Ltd. (NASDAQ:BITF)’s hypothesis are its energy costs, mining capacity, and hash rate. On these fronts, while it benefits from using renewable energy, the corresponding costs are high. Bitfarms Ltd. (NASDAQ:BITF) could see tailwinds in the future if it is able to leverage the growing demand for AI data centers or if it is acquired.
Bitfarms Ltd. (NASDAQ:BITF)’s management commented on its diversification plans during the Q2 2024 earnings call:
“We own and operate a portfolio of high-quality energy assets that are currently monetized through Bitcoin mining. When we take a step back and look at how we get the most value and utilization out of our portfolio, we believe that HPC/AI has real potential. Recent HPC/AI deals are boasting revenues from approximately $140 to $210 per MWh these are potentially very attractive and stable high margin revenue streams not correlated to Bitcoin prices. Comparatively Bitcoin mining with T21 miners yesterday on Aug 7th yielded approximately $80 per MWh. Properly timed we believe that investments in Bitcoin Mining provide a better return on invested capital compared to HPC/AI due to their materially lower CapEx requirements and upside exposure to Bitcoin prices.”
9. Archer Aviation Inc. (NYSE:ACHR)
Number of Hedge Fund Holders In Q2 2024: 21
Archer Aviation Inc. (NYSE:ACHR) is a new age transportation company that is developing electric vertical take off and landing (eVTOL) aircraft. This positions the firm to benefit substantially from clean transport that aims to solve the problem of urban mobility in today’s highly populated mega cities. At the same time, it also exposes Archer Aviation Inc. (NYSE:ACHR) to significant risks as its products are dependent on regulatory clearance from the Federal Aviation Administration (FAA). These risks are also evident in its short interest, with recent data showing that 18.4% of Archer Aviation Inc. (NYSE:ACHR)’s shares outstanding have been sold short. The firm does have a robust backlog of $6 billion though, which includes orders for its Midnight aircraft. This provides visibility into customer confidence and demand for its products, which helps Archer Aviation Inc. (NYSE:ACHR)’s prospects along with the fact that it has completed 400 test flights this year and entered into a contract manufacturing deal with auto giant Stellantis.
During its Q2 2024 earnings call, Archer Aviation Inc. (NYSE:ACHR)’s management shared how it plans to create an air carrier network:
“It’s not enough to just build our order book. We also need to lay the foundation for where these aircraft will fly. Earlier this quarter, we showcased a detailed plan for our air taxi network in the San Francisco Bay Area. This network predominantly leveraged relationships we’ve built with existing aviation infrastructure operators across Silicon Valley, Napa, and the East Bay, including our partners Signature Aviation and Atlantic Aviation. In addition, we revealed our plans with Kilroy Realty for the [indiscernible] vertiport in the heart of South San Francisco, near some of San Francisco’s largest tech companies, including Genentech and Stripe. We also announced plans to develop operational concepts for a joint air taxi network with Southwest Airlines, California’s largest air carrier by passenger and flight volume, operating at 14 airports across the state.
By combining Southwest California airport hubs and frequent interstate flights with Archer’s planned network, the goal is to offer Southwest passengers even faster door-to-door journeys. Routes like Santa Monica to Napa could take less than three hours, nearly half of what they can take today. Today, we unveiled our plans for our air taxi network in Los Angeles. LA commuters spend over 100 hours every year stuck in traffic, and that’s not counting the drives they decide to skip because they didn’t want to spend the time in traffic. This planned network includes takeoff and landing locations at Los Angeles International Airport, USC, Orange County, Santa Monica, Hollywood Burbank, Long Beach, and Van Nuys, alongside our partners Signature and Atlantic Aviation, as well as United and Southwest Airlines.”
