You’ve no doubt learned about the risks many of the wealthiest people in the world had to take to earn their financial greatness. The most successful entrepreneurs we lionize today had to take an enormous risk by starting a revolutionary company from nothing. The risk of failure was great, but so were the potential rewards.
The stock market tends to work the same way. Some of the highest-risk stocks on Wall Street are representative of some of the largest opportunities you’ll come across in your life. If you’ve got the risk tolerance for them, there are plenty of high-risk, high-reward opportunities in the market to take advantage of.
Best High-Risk, High-Reward Stocks to Buy
High-risk, high-reward stocks are not all penny stocks with little more than a hope and a dream — they come in all shapes and sizes. Some of the largest companies in the world can be considered high-risk stocks due to excessive overvaluations, changes in the industries within which they operate, and other factors.
The key to assessing these opportunities is finding balance between risk and reward. Is the risk of a potential decline offset by the potential gains that the investment will generate if it succeeds?
With that in mind, all the stocks below do come with significant risks, but the gains they have the potential to produce are hard to ignore.
1. Tesla (NASDAQ: TSLA)
An Electric Vehicle Powerhouse
By now, everyone knows of Tesla unless they live under a rock. The company is a pioneer in the electric vehicle (EV) space, producing sleek, stylish rides that don’t require a drop of liquified fossils to run on.
As a pioneer, the company has enjoyed dominance in the EV space, with sales in 2020 representing 79% of all new electric vehicles registered in the United States, according to electrek.
It’s not a small-cap player either. Boasting a market cap of more than $1 trillion, Tesla isn’t just a large-cap stock — it’s one of the largest companies in the world. So, what is it that makes the stock a risky investment?
It all boils down to valuation, a topic which has led to significant debates among Wall Street experts when it comes to this EV goliath.
Tesla’s price-to-earnings (P/E) ratio currently stands at over 400. The auto industry as a whole already has an abnormally high P/E ratio of 91.9 according to CSIMarket.com, but that’s largely due to reduced earnings last year as a result of the COVID-19 pandemic. That’s expected to level out in time.
On the other hand, Tesla’s P/E ratio has been exorbitantly high since it started producing earnings in the first place.
Nonetheless, the bulls argue that there’s a good reason for the extraordinarily high P/E ratio. Governments, corporations, and consumers around the world are looking for ways to reduce their carbon footprint, and electric vehicles are one of the best ways to do it. As a result, the EV industry is expected to continue growing at lightning speed.
There’s no question that the company is the leader in the EV space in the U.S., and the bulls argue that this leadership will continue. As a result, Tesla’s earnings should grow far faster than its competitors’ in the auto industry, which justifies the company’s high P/E ratio and sky-high stock price.
Risks to Consider
There’s a long way to go before Tesla’s earnings grow into the stock’s current valuation. Should all go well and Tesla hold onto its leadership position, investors stand the chance to make out like bandits, but there are significant risks that have the potential to throw a wrench into these plans:
- Competition. Legacy auto manufacturers like Ford, General Motors, and Honda are all working to take their place in the electric vehicles market. This has the potential to seriously cut into Tesla’s future profits as these massive players in the automotive industry take their slice of the pie.
- Expensive Vehicles. Tesla doesn’t price its vehicles for the mass market, but to justify its high P/E ratio, it will have to maintain its leadership as interest in EVs grows. While the company is working on bringing more economically friendly options to the table, other lower-cost vehicles may prove to be too much competition for the company to keep its stronghold on the market.
- Elon Musk. Elon Musk is a genius, but he’s also a part-time CEO at Tesla. With Musk’s attention on multiple business ventures, some argue that he simply can’t give the company the time and attention it needs and its investors deserve.
2. Advanced Micro Devices (NASDAQ: AMD)
A Leader in Data Center and Blockchain Technology
Advanced Micro Devices is another massive company that holds the leadership position in its industry. The company focuses on the development, manufacture, and sales of semiconductors, GPUs, and CPUs.
Its products are found in a wide range of products from gaming systems to supercomputers and seemingly every smart electronic device in between.
Most recently, the company has picked up quite a bit of steam as a result of the rise of cryptocurrency. Cryptocurrency is dependent on a mining process that, for most digital coins, requires significant computing power. As cryptocurrency mining continues to gain traction, the company’s sales are likely to grow.
But this also poses a risk. The crypto industry is still emerging, and while it enjoys a lot of interest at the moment, that may not be the case forever. Should these digital coins lose value, demand for the company’s high-end technology could falter, leading to declines in the stock.
Nonetheless, these declines may be largely offset by the company’s efforts in the server and networking world. Data centers around the world are increasingly using AMD technologies to keep websites, apps, and games online for their customers. These technologies are also playing a key role in the continued development of artificial intelligence.
Nonetheless, there are risks to consider.
Risks to Consider
There are a few reasons AMD is considered a risky play on Wall Street. Most importantly:
- Overvaluation. There’s a strong argument to be made that the stock is significantly overvalued. No matter what valuation metric you look at, chances are that the numbers are higher for this stock than others in its space.
- Merger. The company is planning on merging with American semiconductor manufacturer Xilinx, which has led to an increase in AMD’s valuation since the announcement. However, should this merger not come to fruition, investors will be forced to reevaluate the opportunity, and the price of the stock will likely fall.
- Intel. The giant chipmaker Intel soon will be launching its Arc GPUs, a move that’s expected to take place in the first quarter of 2022. These GPUs are designed for data centers, a space that’s overwhelmingly important to AMD. If AMD loses its footing in the data center arena, declines can be expected.
3. Coinbase Global (NASDAQ: COIN)
The World’s Leading Cryptocurrency Exchange
Coinbase is another massive company, but it hasn’t been on the market quite as long as AMD or Tesla. In fact, the company recently launched its IPO in April of 2021. Unfortunately its IPO price was also its all-time high for a long time, with the stock price falling substantially after the IPO. More recently, the stock recovered and reached new highs, and many believe the upward movement will continue.
The company’s revenue model is simple. It facilitates the exchange of currency, whether fiat or crypto, and charges a fee for the service. Moreover, being the largest and most trusted exchange online comes with serious perks. The company enjoys being one of the first brands that comes to mind when a consumer wants to trade crypto.
Risks to Consider
As with any other stock, there are risks to consider before diving into coinbase. Some of the most significant include:
- Regulatory. There are major questions surrounding the regulatory environment of crypto technology. While the U.S. Securities & Exchange Commission (SEC) is looking into the industry, there’s very little in the way of regulatory oversight, leading to fishy business practices among some players in the space. As regulators work to solve this issue, new laws may place restraints on or create hurdles for companies like Coinbase that deal in the cryptocurrency world.
- It’s a Popularity Contest. Cryptocurrencies are the hot new thing on Wall Street — and Main Street. However, there have been tons of new products that were hot for a while and quickly lost their luster. If the crypto community doesn’t remain enthusiastic about the concept, trading could slow substantially, resulting in pain for Coinbase.
- Volatility. Coinbase is a highly volatile stock and much of that volatility since its IPO has been in the downward direction. While there’s always risk in high-volatility stocks, with the growing interest in cryptocurrency and digital assets, this one has the potential to be a big win.
4. Planet 13 Holdings (OTC: PLNHF)
A Successful Vegas Cannabis Company Expanding Into California
Planet 13 Holdings is the first small-cap stock on the list, and it may be the riskiest. However, the growth potential for the stock if all the stars align just right is simply impossible to ignore.
Planet 13 Holdings is a cannabis company headquartered in Las Vegas, Nevada. At first glance, it doesn’t appear to have much to speak of — the company only owns two dispensaries. However, in its most recent financial results, the company said those two dispensaries generated combined quarterly revenues of $23.8 million, working out to $11.9 million in quarterly revenue per dispensary.
That’s likely the best per-dispensary revenue in the industry today.
When you look at the company’s dispensaries, the reason for this jaw-dropping revenue becomes very clear. One of the two properties is the largest cannabis dispensary in the world, located within walking distance of some of the most popular casinos and hotels on the Las Vegas Strip.
This points to the company’s plans moving forward. Next, it plans on replicating its success in California by building another large dispensary that will act as an attraction near Disneyland. Should all go well and the company realize the same success it’s enjoyed in Vegas, the growth in the stock could be astonishing.
Risks to Consider
As mentioned above, Planet 13 is likely the riskiest stock on this list, but could be the biggest winner. Here’s what you should think about before diving in:
- Legalities. At the moment, Planet 13 operates in states where cannabis is legal, but its product is still considered a controlled substance on the federal level. Until the U.S. federal government legalizes cannabis, there will be the potential for a federal crackdown or changes in state laws that would result in significant losses for the company.
- Regulations. Even if the U.S. were to legalize adult-use cannabis on a federal level, there’s no telling what the regulatory environment will be. A poor regulatory environment could harm the company’s bottom line even if cannabis were to become federally legal in the U.S..
- Small Sample Size. Planet 13 is by no means a large company. As mentioned above, it only has two dispensaries and is looking to expand. It’s main driver of success is its largest dispensary, one that acts as a tourist attraction in Sin City. There’s no telling whether or not the company will be able to mimic its success in California near Disneyland or near any other attraction across the U.S.
5. iRobot (NASDAQ: IRBT)
A Growing but Heavily Shorted Consumer Robotics Company
iRobot works in the exciting and growing consumer robotics industry. However, the stock has had a tumultuous year. After dramatic gains early in 2021, the stock has been on a downward slide, and now trades just about at the same level it did when the year opened.
However, there’s a strong argument for investing in the company.
Many argue that from a fundamental standpoint, the company is doing quite well. Not only has it seen revenue growth, it has beaten analyst expectations for earnings for four consecutive quarters.
Furthermore, heavy short selling of the stock — which the bulls argue is unwarranted — has been holding the price down. The stock currently trades with over 25% short interest. But that heavy selling pressure also creates an opportunity.
With strong fundamentals and heavy short interest, it wouldn’t take much to get a short squeeze going on the stock, which would reward the bulls in a big way.
Risks to Consider
Although iRobot looks to be an attractive play, there are a couple of significant risks to consider:
- Continued Short Interest. Continued heavy short interest on the stock may lead to a continuation of the downward movement we’ve seen.
- Betting Against the Trend. Since the beginning of 2021, the stock has been on a steady downward trend. Betting against a trend is often a risky move that can lead to significant losses.
Practice Heavy Diversification When Making High-Risk Investments
High-risk stocks that offer the potential for higher-than-average returns are exciting, but if you’re going to get involved, it’s important to stay diversified.
Only a small percentage of your portfolio’s allocation should be invested in high-risk stocks. The remainder should be invested in quality companies with a history of growth and the ability to stay on the same path.
When practicing diversification, if one or more of your high-risk investments doesn’t pan out as you would have liked, gains in other safer moves in your portfolio will help to ensure the losses don’t become too much to bear.
All in all, the stocks mentioned above come with increased risk compared to stable, blue-chip companies, but in the stock market, being willing to take risks often pays off.
Before making any investment decision, it’s important to do your own research and get a detailed understanding of just what you’re buying.
Disclaimer: The author currently has no positions in any stock mentioned herein nor any intention to hold any positions within the next 72 hours. The views expressed are those of the author of the article and not necessarily those of other members of the Money Crashers team or Money Crashers as a whole. This article was written by Joshua Rodriguez, who shared his honest opinion of the companies mentioned. However, this article should not be viewed as a solicitation to purchase shares in any security and should only be used for entertainment and informational purposes. Investors should consult a financial advisor or do their own due diligence before making any investment decision.