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 New York Community Bancorp, Inc. (NYSE:NYCB) 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).
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New York Community Bancorp, Inc. (NYSE:NYCB)
Number of Hedge Fund Holders In Q2 2024: 30
New York Community Bancorp, Inc. (NYSE:NYCB) is one of the most notable banking stories of 2024. Its stock is down by a whopping 65% year to date after a disastrous Q4 2023 earnings report and a subsequent bond ratings downgrade. The Q4 results saw New York Community Bancorp, Inc. (NYSE:NYCB) post a surprise $0.27 loss per share which was a complete 180 degree from analyst estimates of $0.26 in EPS. The bank blamed this on $185 million of charge offs related to the commercial real estate sector which has been in a constant state of turmoil since the pandemic as well as $552 million in additions to loan loss provisions. New York Community Bancorp, Inc. (NYSE:NYCB)’s faced another headwind in February when Moody’s downgraded all of its bond ratings to Ba2 which is junk bond status. Naturally, investors weren’t pleased, Looking ahead, New York Community Bancorp, Inc. (NYSE:NYCB) is expected to be unprofitable in 2024 and post a small profit in 2025. Any further downsides could further batter the stock, while a beat could see significant tailwinds.
Gator Capital Management shared another key aspect of New York Community Bancorp, Inc. (NYSE:NYCB)’s performance during its Q1 2024 investor letter:
“We believe NYCB’s issues are idiosyncratic to NYCB. NYCB has long been a New York City apartment lender. Their track record over many decades has been spectacular with near zero losses. But, in 2019, NYC passed a law that limited how much landlords could raise rents. In the current inflationary environment, landlords’ costs are rising, but they can’t raise rents, so investors are concerned that landlords will get squeezed so much that they will default on their loans”
Overall, NYCB ranks 7th 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 NYCB 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.