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3 High-Risk, High-Reward Stocks to Add to Your Watch List

By Ryan Downie - Jan 20, 2021 at 6:24AM

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Looking for growth stocks and don't mind risk? Consider these three stocks with huge upside.

Many investors want to shoot for the moon with some portion of their stock portfolio, but it's rare to find a stock with massive upside that the market has completely overlooked. You usually have to assume some level of risk in exchange for major potential, but that's a fair trade for growth investors who can tolerate some volatility. Some of the most promising companies also come with the potential of falling steeply along the way.

If you are the type of investor who wants to hold some high-risk, high-reward stocks, then the following three might be right for you.

DocuSign

DocuSign (DOCU 7.06%) provides a software-as-a-service platform that facilitates the preparation, sending, automation, signing, and management of agreement documentation. The stock rose 200% in 2020, bringing its returns above 500% since its initial public offering in 2018. 

Hand holding a CGI image of a bar chart with ascending bars and upward pointed arrows, indicating growth

Image source: Getty Images.

For cloud software, collaboration technology, and cybersecurity, 2020 was a big year. Businesses were forced to embrace remote solutions for work communication and client interaction, and DocuSign was one of the biggest beneficiaries. The service now has 820,000 paying customers and 122% revenue retention, meaning that existing customers paid considerably more for services in 2020 than they had in 2019. Even more exciting for shareholders, it appears that these gains aren't merely a one-off. People may return to the office once the coronavirus threat subsides, but the past year served to accelerate trends toward more distributed workforces, remote work, digital collaboration, and businesses launching with no offices.

On average, DocuSign's revenue has grown more than 35% annually over the past five years, and this sort of pace is forecast to continue as remote solutions and digital signatures remain an important part of doing business. That's great news for bulls, but you have to pay up if you want to get on board. The stock trades at heavy valuations according to every major metric, with a price-to-sales ratio of 36, a forward P/E ratio of 222, and a price-to-book ratio of 112.

DocuSign shares are undeniably expensive, and the current price assumes strong performance for several years to come. That leaves the stock is at a relatively high risk to fall back to earth in a market correction, but the company may well grow into the high-flying ratios with its excellent growth catalysts over the next few months. 

Phillips 66 Partners

Phillips 66 Partners (PSXP) spun off from its parent company in 2013 as a master limited partnership (MLP). The MLP owns and operates a network of pipelines, terminals, and other midstream assets used in the transportation and storage of crude oil, refined petroleum products, and liquid natural gas. 

The entire energy sector experienced a crisis in early 2020 when oil prices tanked, and it became unprofitable for many producers to continue extracting crude. As a result, the volume of oil flowing through pipelines declined, dragging down the midstream companies' cash flows. 

Stock prices cratered across the energy sector, and Phillips 66 Partners was among the stocks that dropped quickly, which drove its dividend yield up to 11.5%. Despite all of the turmoil, the MLP has managed to deliver revenue comparable to 2019, though it has been less profitable due to some higher expenses. Continued issues in the energy sector or some important pipelines being shut down could cause the MLP to slash dividends.

However, Phillips 66 Partners produces enough operating cash flow to support its quarterly distributions to shareholders, so there's a good chance that holders will continue to enjoy great dividend income streams along with potential appreciation in the future.

Square

Square (SQ 6.81%) offers mobile payment solutions for businesses and owns Cash App, a personal finance app. Fintech has been a major area of disruption in the past decade, and Square is one of the leaders in the charge for both small businesses and individuals. Sales have grown rapidly from $1.3 billion in 2015 to $7.7 billion over the trailing 12 months, and this rate of expansion is forecast to continue in the near term. The company is operating roughly around breakeven as it continues to invest in marketing, product development, and corporate infrastructure.

The risks in this story stem from competition and valuation. Fintech is a crowded space, with participation from tech giants, traditional financial powerhouses, and disruptive newcomers. Despite all this, the stock's 266% rise over the past year has led to some massive valuation ratios. Square's price-to-sales ratio sits at 14.6, and its forward P/E ratio is 192. These aren't shocking for a high-growth company, especially in the current market conditions, but that sort of valuation assumes a good amount of future success.

Any signs of slowdown or a marketwide correction could result in disproportionate losses for Square. However, at present, Square's growth prospects are fantastic due to the quality of its products and the ongoing rise of financial tech. The company is also exploring opportunities in the banking and lending market, which could help boost growth even further. 

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Stocks Mentioned

DocuSign Stock Quote
DocuSign
DOCU
$77.90 (7.06%) $5.14
Phillips 66 Partners LP Stock Quote
Phillips 66 Partners LP
PSXP
Block, Inc. Stock Quote
Block, Inc.
SQ
$87.64 (6.81%) $5.58

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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