Many people only want to own "safe," "mature," or "boring" stocks, and they ignore the opportunities in the risky side of the stock universe. What this does is create a pool of risky stocks with huge potential upside. And often these stocks can be bought relatively cheaply, which makes the risk/reward ratio very attractive.
The stock market tries its best to value these investments. And it often fails, miserably. That's why these stocks can be so incredibly volatile. But if you can withstand the volatility, small investments in risky equities can reward you greatly. Here's why risk-tolerant investors might want to consider shares of Pieris Pharmaceuticals (PIRS -0.58%), Silvergate Capital (SI 9.76%), and Shopify (SHOP -2.37%).
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1. Shopify is somewhat risky
Shopify is my favorite stock. It's a no-brainer. The company has 63% profit margins, and revenues are jumping 41%. I've been in love with Shopify since Amazon (AMZN -1.64%) tried to compete with them -- and gave up. Shopify is the back-end solution that every mom-and-pop retailer who wants to engage in internet commerce needs.
What's the risk to buying Shopify? The stock might get cheaper in the short term. So the risk here is a valuation risk. Shopify trades for 26 times its earnings. A year ago the company was trading for 400 times its earnings. So right now the market is incredibly negative on Shopify. The stock is down 63% in five months. That's a crash, my friends.
One "red flag" for Shopify is that the company is investing aggressively in its business, building out warehouses so that internet retailers can subscribe to its offerings and provide Amazon-like service. The internet transformation of our economy is the major trend of my investing lifetime.
While Shopify's profit margins will likely take a hit over the next few years, it should cement its lead in this space, giving the company a powerful advantage as its technology becomes more and more essential in internet commerce. Don't worry about the volatility. This is an amazing business, and it's on sale right now.
2. Silvergate Capital is risky
Silvergate Capital, like Shopify, is a very profitable company. This is surprising. Often, if a company is growing revenues by 85% from a year ago, you might expect it to be spending money hand over fist in order to achieve that speed. For instance, Snowflake has no profits, MongoDB has no profits, and Okta has no profits.
Yet, here is Silvergate Capital with 45% profit margins. Silvergate pulls this off because it's not a tech stock but a fintech stock with an emphasis on "financial." Silvergate Capital is a bank. Many years ago, Silvergate made a risky bet on a new phenomenon called cryptocurrency. The bank wanted to land the new crypto-trading exchanges like Coinbase and Gemini as clients of the bank. So Silvergate tried to solve the pain points these exchanges were having.
Specifically, crypto trades 24/7. And yet at the time, no banking system could keep up with that schedule. So Silvergate invested in and built out the Silvergate Exchange Network (SEN), a private exchange that allows for bank transfers of dollars regardless of the time of day.
This gamble paid off. The SEN was a huge hit. As Bitcoin (BTC -3.62%) and other cryptocurrencies skyrocketed, more and more of these exchanges needed a banking partner. Demand was so high that Silvergate ultimately closed down its traditional banking business and focused on this new crypto market. At the end of 2021, Silvergate had 1,381 banking clients that were made up of the crypto-trading exchanges and institutions interested in this new asset class. Silvergate also had $14.3 billion in deposits, up from $5.2 billion from the prior year.
In my opinion, the risk for Silvergate from larger banks is minimal. It's in the catbird seat right now and has earned the trust of its banking clients over almost a decade of service. So what makes this a risky stock? At a macro level, we don't know what will happen with the crypto universe and how big (or how small) it might become. So that risk remains. But if you want to minimize your risk while profiting from the rise of crypto, Silvergate is arguably the best place to start.
3. Pieris Pharma is super risky
Unlike Shopify and Silvergate, Pieris has no earnings. It's a biotech without any drugs on the market. This is actually common in the biotech universe, particularly among small-caps and micro-caps. Every year it seems like the biggest loser in my stock portfolio on a percentage basis is a biotech with bad news.
So why invest here? Well, sometimes a calculated risk pays off, like my investment in Novavax (NVAX -0.95%) at $7 (and a double-down at $4). That biotech went on to spike to $330 a share. I'm invested in Pieris in an attempt to duplicate my Novavax success. Pieris, like Novavax in 2019, is a stock that could go to nothing. So my investment here is tiny (under 1% of my investing assets). But the potential upside is vast.
Pieris owns the rights to an entire new class of pharmaceuticals called Anticalins. These are protein therapeutics that are similar to antibodies, but eight times smaller -- so they can go places antibodies can't reach. For instance, Pieris has an asthma drug candidate that's similar to an antibody treatment. But since it's so tiny, the Pieris molecule can reach the lung directly -- something antibodies can't do.
Pieris has collaboration agreements with Roche, AstraZeneca (AZN 0.49%), and Seagen (SGEN). And those drug companies have made upfront payments to Pieris to acquire rights in some of the biotech's most advanced drugs. Big Pharma is paying for the early clinical trials, and if the drugs achieve certain milestones, the payouts increase.
If Pieris hits all of the milestones in these three contracts, the company will have a windfall of $8 billion. For a tiny micro-cap, that's a huge upside. (And that doesn't include any future royalty payments.) But what's really exciting is that Pieris owns the entire library of Anticalin molecules, 100 billion of them. If any of these molecules are successful, then we might see Anticalins start to take a significant chunk of the antibody market (roughly a $145 billion market).
Right now, the stock market is assuming Pieris' drugs will fail. So the biotech has a minuscule market cap of $229 million. But what if the biotech beats the odds and its Big Pharma partners report any success? The potential upside is phenomenal. We should know more as Pieris reports phase 2 efficacy data later this year.
