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3 High-Risk, High-Reward Growth Stocks to Buy Now

By Zhiyuan Sun - Updated Apr 12, 2021 at 3:00PM

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Got a high tolerance for risk? Here are some stocks that could potentially have huge payoffs.

The idea of becoming either rich or broke off a single investment is probably outside most people's comfort zones. However, for those who can stomach the performance of volatile stocks, there are ample rewards at the end of the tunnel. 

Today, let's look at why bold investors could benefit from going long on an electric vehicle manufacturer, a teledentistry company, and a mortgage underwriting firm. These are Tesla (TSLA -6.42%)SmileDirectClub (SDC 8.89%), and Rocket Companies (RKT -1.00%), respectively. 

Two men looking over a cliff.

Image source: Getty Images.

1. Tesla

At 23.5 times revenue, Tesla is arguably the most expensive automobile stock in the world, considering that the average stock in the sector only trades for 2.71 times revenue. However, the company has everything it needs to back up its stock price.

During the first quarter of 2021, the company delivered 184,800 Model S/X/Y/3 cars, which is up from 88,400 in Q1 2020. Management is also proud of the company's ability to maximize the range, recharge time, and acceleration time of its electric vehicles while minimizing cost. 

Last year, revenue was up 46% annually to $10.74 billion, and gross margins expanded by 4.37 percentage points to 25.6%. Meanwhile, Tesla's free cash flow improved by 84% over 2019 to $1.87 billion. The especially good news is that the company can keep up these results. It is currently developing or constructing additional six factories, while its existing production capacity amounts to 1.05 million cars per year.

The main problem with Tesla is that its stock is pretty expensive. Right now, there is a lot of excitement for electric cars, along with ample government incentives for cash buyers. However, even the slightest mismatch between vehicle deliveries and production (say, in the midst of a recession) could cause the company's stock to tank big-time. Caveat emptor. 

2. SmileDirectClub

Unlike traditional metal braces, SmileDirectClub creates plastic aligners to improve patients' smiles. The treatment is finished in as little as four to six months and costs just $3 per day for 24 months with financing. Since its inception, the company has treated more than 1 million people and has a 96% positive rating from 90,679 Google reviews.

In 2020, the company took a tough hit from the COVID-19 pandemic, with revenue down 12.4% from the previous year to $657 million. However, it did manage to narrow its net loss from $538 million in 2019 to $278 million.

Management anticipates a return to growth in Q1 2021, with a revenue increase of 5% to 7%. At the end of the day, a price-to-sales (P/S) valuation of 5.82 isn't a bad price to pay for a leading teledentistry company.

Some potential investors might worry about SmileDirectClub's ability to generate cash flow, given that for many people, braces and retainers have been a one-time occurrence. The business is all over that concern, recently launching a Lifetime Smile Guarantee program, which permits qualified members to receive one retainer on an annual basis for life. The company has also launched a line of oral healthcare products in stores including CVS, Walgreens, and Walmart, diversifying its revenue streams. These efforts show that SmileDirectClub is working to ensure that customers keep coming back, so that they can have beautiful smiles forever. For that, I think it's worth adding this healthcare stock to your watch list.

3. Rocket Companies 

Rocket Companies is at the center of the U.S. housing boom, writing $320 billion worth of mortgages last year. That's up from $145.18 billion in home-secured loan originations in 2019. After all, the COVID-19 pandemic has made it a standard practice to work at home. So it's natural to see a mass exodus of people escaping the high cost of living in cities and fleeing into rural areas to set up their home offices.

The massive demand for housing has, in turn, propped up Rocket Companies' revenue by a stunning 208% year over year to $15.7 billion. At the same time, earnings were up tenfold to $9.4 billion in 2020. Its services hold a 91% retention rate among customers.

Right now, the company is seeing 153 million unique visitors a year to its platform. It partners with 25,000 real estate agents and 50,000 mortgage professionals nationwide to cater to its customers' needs. Besides having a significant market share in real estate, the company also sees $750 million in gross transaction volume per year on its e-commerce car sales platform.

Trading at just 2.83 times revenue and 4.73 times earnings, this is one bargain consumer finance stock you don't want to miss. However, its rate of growth isn't very sustainable in the long term. Investors should be prepared for massive losses in case of a housing slowdown. Keep housing inventories in mind and consider exiting the stock when sales start to decelerate.


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Stocks Mentioned

Tesla, Inc. Stock Quote
Tesla, Inc.
$663.90 (-6.42%) $-45.52
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$119.20 (0.11%) $0.13
CVS Health Corporation Stock Quote
CVS Health Corporation
$94.93 (1.92%) $1.79
Walgreens Boots Alliance, Inc. Stock Quote
Walgreens Boots Alliance, Inc.
$40.96 (0.86%) $0.35
SmileDirectClub, Inc. Stock Quote
SmileDirectClub, Inc.
$1.47 (8.89%) $0.12
Rocket Companies, Inc. Stock Quote
Rocket Companies, Inc.
$8.90 (-1.00%) $0.09

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

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