As the old saying goes, no risk, no reward. Safe and boring stocks are a great idea for most investors, but riskier stocks have the potential to provide investors with outsize returns. People define risk in different ways, but one of the biggest risks with holding an individual stock is that the story plays out differently than expected. The riskier the stock, the larger the number of ways that things could go wrong.
With that in mind, and realizing that no one knows what the future holds, here's a look at three stocks our Foolish contributors have identified as great bets for high-risk investors.
Tim Green: Betting on a turnaround is an inherently risky proposition, but investors willing to go against popular opinion can be rewarded handsomely if things work out. Toymaker Mattel (MAT -0.66%) is a perfect example of a turnaround play that, while risky, offers the potential for outsize returns.
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Mattel has been struggling under the weight of its own bureaucracy. The nimbleness that a toymaker needs to get products to market in a timely fashion vanished from Mattel under the previous management, and it took the awful holiday season of 2014 for the company to make changes. During the fourth quarter of 2014, sales slumped 6% year over year while operating profit tumbled by more than 50%. Mattel's execution was terrible, with the company promoting different products on TV than were featured in stores, leading to the loss of shelf space that only exacerbated Mattel's woes.
The good news is that Mattel's wounds are self-inflicted, and while profits have fallen off a cliff, the company is still quite profitable, with an operating margin of 8.5% in the trailing-12-month period. This is far below typical levels for the company, but my favorite kind of turnaround is one where the company remains profitable throughout. Mattel also pays a dividend, and the yield has ballooned to about 5.7% thanks to a slumping stock price. There is a chance that this dividend gets cut, but for the time being investors are collecting some very nice dividend payments.
What makes Mattel stock risky is the chance that the turnaround efforts fail. Mattel could very well stagnate, with depressed profitability becoming the norm, and in that case the stock could fall further. But for those patient enough to stick with Mattel, the stock will be worth a lot more if the company can get back on track.
Dan Caplinger: The restaurant space is notorious for having high-flying stocks that eventually fall to earth and disappoint long-term shareholders. However, for those willing to bet on a trend getting established over the long haul,Chuy's Holdings (CHUY 0.53%) has a lot of promise. The Tex-Mex restaurant chain thrives on offering an unconventional experience, with each location taking on an identity of its own even as the company expands rapidly from its home base in Texas into the Southeast and Midwest.
Recently, Chuy's has arguably benefited from the woes of Mexican fast-casual counterpart Chipotle Mexican Grill (NYSE: CMG), which is looking at the prospect of double-digit drops in comparable-restaurant sales stemming from the recent outbreaks of foodborne illnesses at numerous locations in its network. With the stock trading at more than 35 times trailing earnings, Chuy's stock has a lot of future growth priced in, and investors have to believe that the company will be as successful in its new locations as it has been at its long-established restaurants. Nevertheless, Chuy's stock has performed well lately, and if you're willing to accept the high risks of the restaurant business, Chuy's could be a tasty addition to your portfolio.
Matt DiLallo: For a lot of investors, the oil industry is risky enough. Commodity price volatility when combined with a lot of leverage is a recipe for disaster. That's likely the word most of us would describe an investment made in the sector over the past couple of years. That being said, should oil prices being to rebound in 2016 it would send oil stocks spiking. While there are a number of oil stocks that would benefit from rising crude prices, one oil stock that's on the high-risk/high-reward side of the spectrum is Bakken shale-focused Oasis Petroleum (OAS).
Thanks to its integrated business model, Oasis Petroleum has pushed its well costs down 30% over the past year. Further, it has also been able to pull its operating costs below expectations. Because of this the company had been generating free cash flow over the past few quarters and expected that trend to continue. In fact, at a $50 oil price Oasis can deliver modest production growth while remaining cash flow positive, which is something that only a small handful of producers can match.
Unfortunately, with oil now closer to $33 a barrel, it's nearly impossible for Oasis to break-even, meaning it's likely going to have to use its balance sheet until prices improve. This weight pushed the stock price down nearly 50% over the past three months. However, once that weight is lifted as oil prices rebound, it could fuel quite a strong rally in Oasis' stock. So, for investors that aren't afraid of a high-risk idea, Oasis could really pay off if oil turns around.
