We recently published a list of 10 High Risk High Reward Growth Stocks Stocks To Buy. In this article, we are going to take a look at where Ginkgo Bioworks Holdings, Inc. (NYSE:DNA) stands against other high risk high reward growth stocks.
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.
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).
A close up of a laboratory beaker filled with colorful chemicals, signifying the company’s specialty chemicals.
Ginkgo Bioworks Holdings, Inc. (NYSE:DNA)
Number of Hedge Fund Holders In Q2 2024: 32
Ginkgo Bioworks Holdings, Inc. (NYSE:DNA) is a high end biotechnology company that is perhaps one of the riskiest on our list. This is because the firm is one of the few companies in the world that is developing a genetic engineering platform to produce bacteria for industrial raw material production. Ginkgo Bioworks Holdings, Inc. (NYSE:DNA) is yet to post an operating income, and its ability to grow requires not only successfully growing its commercial presence but also seeing a significant demand for its products across a variety of industries such as pharmaceuticals and agriculture. Ginkgo Bioworks Holdings, Inc. (NYSE:DNA) also recently underwent a remarkable 1 for 40 reverse stock split, and the keys to its hypothesis moving forward will be management’s ability to manage costs and land big deals for products. The firm does have $730 million in cash and equivalents which provide it some room to fund operations as it targets aggressive growth.
Ginkgo Bioworks Holdings, Inc. (NYSE:DNA)’s management shared details for its cell engineering programs during the Q2 2024 earnings call:
“While still very early days, this slide gives you some detail on how the nature of programs is changing. We added a total of 18 new programs and contracts in Q2 2024, of which 10 were generally comparable in size and scope to historically reported new programs. Importantly, you’ll note that of those 10 deals, 5 included downstream value share potential. In addition, we commenced 8 other customer contracts in the quarter that represent a variety of small deal architypes. These are generally much smaller in scope and shorter in duration and included 2 lab data-as-a-service deals in the protein characterization space, that we signed with a large cap tech company, which itself is an entirely new customer segment. The current sales pipeline for both categories of deals is solid.”
Overall, DNA ranks 6th on our list of high risk and high reward stocks. But our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DNA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
