In this piece, we will take a look at the 12 best high risk high reward stocks to buy now. If you want to skip our background on investing, then head on over to 5 Best High Risk High Reward Stocks To Buy Now.
Investing is a risky endeavor, as is anything that involves the future. After all, no one really knows what’s going to happen tomorrow, and the best that we can do is read the tea leaves to wager a guess at future outcomes. When it comes to stocks, these tea leaves include a wide variety of financial ratios and technical indicators that are often combined to paint a detailed picture of a firm’s future.
The ratios are part of financial analysis that is called fundamentals based investing. Rather self explanatory on the surface, it involves pouring over countless financial metrics in a firm’s balance sheet and then combining them to gain a better picture of its performance. One of the most common ratios is the price to earnings ratio, and it is often used to gauge market sentiment about a company. A firm’s earnings per share measures its profitability while its price is the amount that investors are willing to pay for the stock. A ratio of the two determines when the shares are undervalued or overvalued, and they come in several flavors which you can check out by reading 10 Best Inexpensive Stocks To Buy Right Now.
Naturally, the higher the P/E ratio is, the more risky a stock is since its price can significantly drop should it fail to grow earnings over the long term. The premise behind a high price to earnings is that investors are confident about a company’s ability to deliver earnings growth in the future and as a result, they are willing to pay for these earnings today. As an illustration, consider the example of one of the more well known growth stories of our time. Advanced Micro Devices, Inc. (NASDAQ:AMD), known for competing with the much larger semiconductor firm Intel Corporation (NASDAQ:INTC) had been unprofitable as recently as 2017.
As AMD started to become profitable, its P/E ratio soared to 178 in 2019 and remained above 100 for the next year before sitting around the 70 mark. Investors were betting that AMD would rapidly grow its market share since it is only one of the few companies that has the license to manufacture and sell semiconductors manufactured with the x86 microarchitecture, and the only one that can compete at scale with Intel. AMD’s P/E ratio soared to 515 for its March quarter after the firm’s profits dropped during the semiconductor downturn currently going on.
Another financial ratio, and one that is relatively less known is the price to sales ratio. While the P/E ratio measures a firm’s value relative to its bottom line profit, the price to sales ratio measures the value relative to its revenue. It was introduced to current financial nomenclature by none other than Ken Fisher of Fisher Investments. Mr. Fisher is one of the stock market gurus who is known for his sharp insights into the market and his uncanny ability to separate market trends from market chatter.
According to the legendary investor, the price to sales ratio is a tool to simply measure the popularity of a stock. He believes that revenue is a better indicator of a firm’s value and P/E ratios end up being affected by accounting rules and principles that determine net income. In an article for the American Association of Individual Investors (AAII) in June 1984, he wrote:
Price-sales ratios measure the popularity of the stock. This is helpful for a number of investment theories. A long-held standard of such legendary investors as Warren Buffett, Philip Fisher, Benjamin Graham, John Templeton and others is to buy unpopular stocks of good companies. But first, you must know if a stock is popular or not.
It is becoming common to view low price-earnings stocks as synonymous with low popularity. I have nothing against the low price-earnings school and view low price-earnings ratios as a viable way to seek above-average reward at below-average risk. But low price-earnings ratios are not a strong measure of popularity. They are too elastic.
Too much attention is focused on current earnings. Earnings are a result—not a cause. At best, they result from a lot of accounting assumptions trickling their way through an operating company’s books. The basic factors affecting the value of a stock tie more closely into the income statement’s top half—a company’s product position and cost structure allowing it to do a certain amount of business. Employing the price-sales ratio as another tool of analysis helps put stocks in their proper perspective.
At the same time, high price to sales can also signal potential risks similar to the P/E ratio since both value firms significantly higher than what their fundamentals approach. However, Mr. Fisher’s research is quite interesting when it compares the returns of P/E stocks and P/S stocks. Take a look:
We decided to compare the lowest 25% price-sales ratio stocks in the list versus the lowest 25% price-earnings ratio stocks.
. . . The results:
– The seven lowest price-sales ratio stocks averaged gains of +63.57%.
– The nine lowest price-sales ratio stocks averaged gains of +56.11%.
– The nine lowest price-earnings ratio stocks averaged gains of +28.67%.
– At the same time, the DJIA averaged a gain of 20.3%.
So, we decided to take a look at some high risk, high reward stocks with the top picks being Xenon Pharmaceuticals Inc. (NASDAQ:XENE), Iovance Biotherapeutics, Inc. (NASDAQ:IOVA), and Karuna Therapeutics, Inc. (NASDAQ:KRTX).
Photo by Karolina Grabowska from Pexels
Our Methodology
To compile our list of high risk high reward stocks, we compiled an initial list of firms with P/S ratios greater than 20. Then, the number of hedge funds that had invested in them out of the 910 part of Insider Monkey’s second quarter of 2023 database was determined and the top 12 stocks are as follows.
12 Best High Risk High Reward Stocks To Buy Now
12. Aurora Innovation, Inc. (NASDAQ:AUR)
Number of Hedge Fund Investors In Q2 2023: 17
Latest P/S Ratio: 732.25
Aurora Innovation, Inc. (NASDAQ:AUR) is a software firm that is developing self driving products and technologies. The firm had great first and second quarters as it narrowed its net loss for the first half of 2023 by a strong 66% and also reduced the loss per share.
As of Q2 2023 end, 17 out of the 910 hedge funds polled by Insider Monkey had invested in Aurora Innovation, Inc. (NASDAQ:AUR). Along with Xenon Pharmaceuticals Inc. (NASDAQ:XENE), Iovance Biotherapeutics, Inc. (NASDAQ:IOVA), and Karuna Therapeutics, Inc. (NASDAQ:KRTX), it is a high risk and high reward stock that hedge funds are buying.
11. Avadel Pharmaceuticals plc (NASDAQ:AVDL)
Number of Hedge Fund Investors In Q2 2023: 20
Latest P/S Ratio: 622.72
Avadel Pharmaceuticals plc (NASDAQ:AVDL) is a drug manufacturer that sells products for sleeping disorders. Despite being unprofitable, the firm’s shares are up by a strong 97% year to date, with a commercial drug launch in the U.S. and FDA approval acting as some tailwinds.
Insider Monkey’s second quarter of 2023 survey of 910 hedge funds revealed that 20 had bought Avadel Pharmaceuticals plc (NASDAQ:AVDL)’s shares. Out of these, the firm’s biggest shareholder is Jeffrey Gendell’s Tontine Asset Management since it holds a stake worth $88.9 million.
10. Inhibrx, Inc. (NASDAQ:INBX)
Number of Hedge Fund Investors In Q2 2023: 20
Latest P/S Ratio: 1,370
Inhibrx, Inc. (NASDAQ:INBX) is a biotechnology firm that is developing cancer and tumor treatments. Despite the fact that the firm has missed analyst EPS estimates in three of its four latest quarters, the stock is rated Strong Buy on average.
Insider Monkey took a look at 910 hedge fund portfolios for this year’s June quarter and discovered that 20 had invested in the company. Andreas Halvorsen’s Viking Global is Inhibrx, Inc. (NASDAQ:INBX)’s largest stakeholder, owning 6.6 million shares that are worth $172 million.
9. Enovix Corporation (NASDAQ:ENVX)
Number of Hedge Fund Investors In Q2 2023: 20
Latest P/S Ratio: 1,870
Enovix Corporation (NASDAQ:ENVX) is a battery company headquartered in Fremont, California. The firm beat analyst EPS estimates for its second quarter earnings, and Oppenheimer has rated the stock as a Strong Buy and set a price target of $36.
By the end of 2023’s second quarter, 20 out of the 910 hedge funds tracked by Insider Monkey had held a stake in Enovix Corporation (NASDAQ:ENVX). Peter S. Park’s Park West Asset Management is the company’s biggest hedge fund investor since it owns $97 million worth of shares.
8. Geron Corporation (NASDAQ:GERN)
Number of Hedge Fund Investors In Q2 2023: 20
Latest P/S Ratio: 2,570
Geron Corporation (NASDAQ:GERN) is a biotechnology firm making treatments for severe liver diseases. It scored a win in August when the FDA accepted its drug filing for an anemia treatment.
Insider Monkey scoured through 910 hedge fund portfolios and discovered 20 Geron Corporation (NASDAQ:GERN) investors as of Q2 2023 end. Out of these, the firm’s largest shareholder is Peter Kolchinsky’s RA Capital Management due to its $101 million stake.
7. Relay Therapeutics, Inc. (NASDAQ:RLAY)
Number of Hedge Fund Investors In Q2 2023: 21
Latest P/S Ratio: 1,310
Relay Therapeutics, Inc. (NASDAQ:RLAY) is another biotechnology company. It develops treatments for genetic disorders and cancer. The shares are rated Strong Buy on average and its second quarter results saw both revenue and earnings per share drop.
During June 2023, 21 out of the 910 hedge funds polled by Insider Monkey had held the firm’s shares. Relay Therapeutics, Inc. (NASDAQ:RLAY)’s biggest stakeholder is Eli Casidin’s Casdin Capital since it owns 5.9 million shares that are worth $75.3 million.
6. Verona Pharma plc (NASDAQ:VRNA)
Number of Hedge Fund Investors In Q2 2023: 22
Latest P/S Ratio: 3,190
Verona Pharma plc (NASDAQ:VRNA) makes treatments for lung diseases such as asthma. The stock hasn’t done so well this year, as it is down 23% year to date. However, Wedbush has rated the shares as Outperform, and the stock is rated Strong Buy on average. Verona Pharma plc (NASDAQ:VRNA)’s second quarter results saw it smash analyst EPS estimates out of the park, primarily due to a reversal of accrued costs and lower research and development expenses.
22 out of the 910 hedge funds part of Insider Monkey’s Q2 2023 database had held a stake in Verona Pharma plc (NASDAQ:VRNA). Out of these, the largest hedge fund investor is Peter Kolchinsky’s RA Capital Management through a $133 million stake.
Xenon Pharmaceuticals Inc. (NASDAQ:XENE), Verona Pharma plc (NASDAQ:VRNA), Iovance Biotherapeutics, Inc. (NASDAQ:IOVA), and Karuna Therapeutics, Inc. (NASDAQ:KRTX) are some high risk, high reward stocks to buy now.
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Disclosure: None. 12 Best High Risk High Reward Stocks To Buy Now is originally published on Insider Monkey.