If you invest in stocks, you know that you're trading risk for the potential of generating rewards. But some stocks have higher risks -- and the potential for much higher rewards -- than others.
We asked three Motley Fool contributors to pick the high-risk, high-reward stocks they think investors should add to their watch lists. Here's why they chose Albemarle Corporation (ALB 6.56%), Baozun (BZUN 4.90%), and Trulieve Cannabis (TCNNF -5.15%).
That's one big bet
Reuben Gregg Brewer (Albemarle Corporation): The most notable thing about Albemarle's stock is that it has fallen roughly 55% from its late-2017 highs. That's largely because of a shift in investor perceptions related to lithium, an industrial metal used in batteries. This metal is expected to be Albemarle's growth engine, and the big risk is that demand doesn't match up with the company's projections, which call for 21% annualized demand growth between 2018 and 2025.
First off, Wall Street has moved on from the lithium story, leaving lithium prices and stocks languishing. But Albemarle is also showing some signs of concern, pulling back on its capital spending plans and starting to work with partners to reduce costs and risk. It still has huge production growth plans, as it looks to double output by 2021, but it has taken a far more cautious stance than it had at the start of the year.
So investors looking at Albemarle are taking on material risk on the lithium and execution fronts. But the rewards of doubling production, and possibly higher prices if demand outstrips supply, could be huge. If the company's projections play out, it will be very well positioned to benefit.
But there's one more thing to note. Lithium was just about half of the company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the second quarter. The other half of the business, bromine and catalysts, is fairly stable and provides the foundation on which the company is spending in lithium. So there are clear risks at Albemarle, but the broader portfolio provides some offset. All in all, Albemarle looks like a pretty good balance between risk and reward. Add in a 2.3% yield backed by 25 years of consecutive annual dividend increases and there's even more to like here.
The trade war might be scary, but these numbers aren't
Keith Noonan (Baozun): By some metrics, Baozun doesn't look particularly high risk as far as growth stocks go. The company trades at roughly 30 times this year's expected earnings, and it managed to grow adjusted net income 65% and 46% in the first and second quarters of the year, respectively. An investor like Peter Lynch might look at that kind of price-to-earnings growth mismatch as being indicative of a big opportunity.
It's not like things are bad for the Chinese e-commerce services company on the revenue side of things, either. Sales for the first quarter rose roughly 40% year over year, and sales for the company's recently reported second quarter were up 47%.
In a recent roundtable discussion with my Motley Fool colleagues Keith Speights and Reuben Gregg Brewer, I noted that Baozun had an above-average risk profile when naming it as my choice for a stock that's worth building a portfolio around. That's not because I don't believe in the longevity of the business. It's one of my top growth picks, and I view pricing dips as an opportunity to continue adding to my position. However, there are a lot of factors that go into the company's performance and stock price -- and some of them aren't easy to predict.
Despite posting sales and profit in the second quarter that came in well ahead of the market's expectations, Baozun stock fell double digits after its second-quarter earnings results. Since then, the outlook for the ongoing trade war between China and the U.S. has taken another turn for the worse, with each party planning to ramp up tariffs on the other's goods and assuming a more aggressive posture. The trade situation makes Baozun a risky short-term play at the moment, but its underlying business continues to look sound, and I think the stock remains promising as a long-term investment.
A sunny outlook
Keith Speights (Trulieve Cannabis): Yes, investing in the cannabis industry is risky. After all, cannabis remains illegal at the federal level in the U.S. But I think that aggressive investors might want to take a look at Trulieve Cannabis for several reasons.
First of all, Trulieve is something of a rarity among cannabis stocks in that it's already profitable. The company reported record-high revenue and earnings in its second-quarter results announced earlier this month. Trulieve's sales soared 30% -- not on a year-over-year basis but instead compared to the previous sequential quarter.
I also like Trulieve's focus on the medical cannabis market in Florida. The Sunshine State presents a great opportunity for medical cannabis in part because many people move to Florida during their retirement years when they're more likely to suffer from some of the conditions for which medical cannabis is frequently prescribed.
There's also a realistic chance that Florida could legalize recreational cannabis in the near future. Efforts are underway to put an amendment on the 2020 ballot in the state to make recreational cannabis legal. Trulieve has donated to support these efforts and would be a huge beneficiary if the amendment makes the ballot and wins approval. A recent survey found that 65% of Floridians support legalizing recreational pot.
Even if those efforts don't succeed, Trulieve has plenty of room to grow in the medical cannabis market in Florida. The company could also beef up its operations in other states. Trulieve is a risky stock, but I think its outlook is quite sunny.