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3 High-Risk, High-Reward Stocks to Add to Your Watchlist

By Rekha Khandelwal - Updated Feb 19, 2021 at 1:01PM

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These stocks generated multibagger returns last year and have the potential to generate similar returns in future too.

Established companies with proven business models generally provide you predictable returns for minimal risks. Though these provide a great way to build a fortune over years, some others, often still in their nascent stages, have the potential for far more dramatic growth. These stocks could generate outsized returns, often in a shorter time span. Adding such high-risk, high-reward stocks to your portfolio could be a smart way to boost your returns. Here are three such stocks that should be on your radar as potential candidates to add to your portfolio.

1. Plug Power

The stock price of leading hydrogen fuel cell manufacturer Plug Power (PLUG -0.72%) has soared dramatically in the last couple of years. The reason behind investors' enthusiasm for Plug Power, and other fuel cell stocks, is the potential role of hydrogen in the world's transition toward cleaner energy sources. For example, the European Commission envisages as much as 13% to 14% of Europe's energy coming from hydrogen by 2050. Similarly, hydrogen as an energy source is getting major support in Asia, mainly in China, Japan, and Korea.

Hand drawing risk and reward balance scale on chalkboard

Image source: Getty Images.

Plug Power, which has largely focused on forklifts so far, sees enormous potential in the transportation segment. Its recent partnerships with Korea's SK Group and carmaker Renault position it well for the potentially huge electric vehicles market. As a pioneer in hydrogen fuel cell technology, Plug Power stands to gain if this technology gets widespread adoption.

Still, investors should watch for two things to happen before jumping into this stock. First, the company, which has been incurring losses for the last 20 years, should show profits or a feasible plan to that end. Second, the stock's valuation should fall in line with the company's financial performance. Despite key risks, Plug Power looks better placed among fuel cell companies to benefit from hydrogen's growth as an energy source.

2. Sunnova Energy

Residential solar panel installer Sunnova Energy (NOVA -0.57%) grew impressively in the last couple of years. Growing environmental concerns, falling solar panel and battery costs, and supportive government policies have all contributed to the growth of the residential solar market. In nearly a decade, the cost of panels has fallen roughly 65% on a per-watt basis. Similarly, lithium-ion battery costs have fallen roughly 85% during this period. This has made solar power more attractive compared to fossil fuels. What's more, the residential solar market is still underpenetrated, with less than 3% of all U.S. homes currently using solar power. Thus, it has immense growth potential.

Sunnova Energy is rapidly growing in this massive potential market. The company grew its number of customers from 78,600 at the end of 2019 to 98,600 at the end of the third quarter of 2020. The company's growth is driven by new dealers that it's adding, as well as additional services being sold to existing customers. Sunnova is making a good headway in the competitive residential solar installation market, which is highly fragmented right now. Though it faces stiff competition from bigger players, like Sunrun (RUN -1.24%), it has shown strong growth in the last few quarters. If it can continue growing at this pace, it will likely emerge as one of the top players soon, making it a stock you would like to keep on your radar.

3. Enphase Energy

Microinverter supplier Enphase Energy (ENPH 1.64%) is another solar stock set to benefit from solar energy's expected growth. Over years, the company has been growing its revenue at an impressive rate. In the fourth quarter, its revenue grew 26% year over year. Enphase's revenue growth is driven by strong demand for its microinverters. Additionally, its newly launched power battery witnessed a 35% sequential increase in sales for the quarter. 

ENPH Revenue (Quarterly YoY Growth) Chart

ENPH Revenue (Quarterly YoY Growth) data by YCharts

Furthermore, Enphase Energy is growing its gross profit margins too. As the above graph shows, Enphase's gross margins recently were higher than those of its rival SolarEdge Technologies (SEDG 1.84%). Enphase aims for 35% gross margin, at 15% operating expenses, while generating 20% operating income. It hit this benchmark in the fourth quarter. The company's impressive performance over the last couple of years has shot up its stock's valuation.

ENPH PE Ratio Chart

ENPH PE Ratio data by YCharts

Enphase Energy is trading at a huge premium compared to SolarEdge and the broader market. In the long term, it would be difficult for the company to keep growing revenues at the current high rate, while also generating the high margins that it currently does. Low-cost suppliers could potentially strain Enphase's high margins.

However, as an early entrant and innovator, Enphase Energy could maintain its edge by providing better and cost-effective products in an evolving market. That makes it a stock that's definitely worth adding to your watchlist right now.

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Stocks Mentioned

Plug Power Inc. Stock Quote
Plug Power Inc.
$16.45 (-0.72%) $0.12
Enphase Energy, Inc. Stock Quote
Enphase Energy, Inc.
$168.25 (1.64%) $2.71
SolarEdge Technologies, Inc. Stock Quote
SolarEdge Technologies, Inc.
$256.81 (1.84%) $4.63
Sunrun Inc. Stock Quote
Sunrun Inc.
$23.07 (-1.24%) $0.29
Sunnova Energy International Inc. Stock Quote
Sunnova Energy International Inc.
$17.29 (-0.57%) $0.10

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