Fools like us look for companies that are on rock-solid financial footing, but we certainly believe that it can be a smart idea to invest in riskier stocks every once in a while to help spice up the returns of your portfolio. With that in mind, we asked our team of Motley Fool contributors to share a stock idea that they think could hold huge upside if everything goes according to plan, but is only a good choice for an investor with a strong stomach for risk. Read below to see which companies they highlighted, and judge for yourself whether or not the potential reward is worth the risk.
Right now, anything oil-related is pretty high-risk. However, I see oil-field service company Baker Hughes (NYSE:BHI) having both an extra helping of risk and an outsize portion of upside.
Aside from its exposure to the slumping energy sector, what makes Baker Hughes higher-risk is its pending merger with Halliburton (NYSE:HAL). That deal was announced more than a year ago, but the closing has been delayed due to close scrutiny by regulators, who are worried that combining the No. 2 and No. 3 oil-field service companies would make the entire sector less competitive, because it would widen the gap between the top-tier players and the next rung on the ladder.
To alleviate those fears, Halliburton has offered an ever-growing number of asset sales, especially of overlapping businesses, which it believes will water down those competitive fears. There's a real risk this deal falls through, which would likely cause both stocks to slump significantly. However, if the deal were to be abandoned, Baker Hughes would get a $3.5 billion breakup fee for its troubles, which is a big chunk of change that it could use to reinforce its own competitive position.
The bottom line here is that the combination of Halliburton and Baker Hughes would create a bellwether oil-field service giant. It's a company that would have an enhanced position to reward investors over the long haul, especially when oil and gas activities rebound. It's that potential reward that makes it a great stock for high-risk investors to consider.
Small-cap biotechnology stocks are the ultimate high-risk, high-reward investing category, as these stocks tend to either make it big or flame out in spectacular fashion. That makes investing in the space especially risky, so investors need to proceed carefully.
One company that I have my eye on is Prothena Corporation PLC (NASDAQ:PRTA), an Irish biotechnology company that looks like it holds a lot of promise. This company's stock skyrocketed 234% higher in 2015 as investors got a look at phase 1 clinical data from PRX-002, a compound it's studying in partnership with Roche as a potential treatment for Parkinson's disease.
The trial showed that PRX-002 reduced levels of a brain protein called alpha synuclein (which regulates dopamine production and is associated with Parkinson's disease) by up to 96%, and did so with placebo-like safety. This data point suggests that PRX-002 might be able to effectively treat the root cause of Parkinson's disease, so the compound holds the potential to be a breakthrough. With roughly 1 million people in the U.S. alone living with Parkinson's disease, and another 60,000 new cases diagnosed annually, this drug could hold megablockbuster potential if it lives up to its hype.
Of course, the key word in that last sentence is "if" -- and even if everything goes perfectly from here, it will still be a long time before PRX-002 could find its way to market. Still, the potential of PRX-002 is so big that this might be a good choice for investors who are looking to swing for the fences.
Evan Niu, CFA
I'm a growth investor at heart, which is somewhat related to me being a gambler at heart, too. That's why I'm going with Tesla Motors (NASDAQ:TSLA) as a suitable pick for high-risk investors. When you're talking about a company that's literally trying to help save the world by reducing the environmental impact of transportation, the stakes don't get higher than this.
Tesla gets a lot of media attention thanks to its technological accomplishments. This is largely what drives -- no pun intended -- the excitement around the company, and the valuation, as well. In the grand scheme of the global auto market, Tesla's unit volumes are barely a rounding error.
Because so much of Tesla's valuation is predicated on its future performance -- like most growth stocks -- it carries extremely high valuation multiples, and entails an incredible amount of risk. Shares have lost more than 40% of their value from the highs set last summer.
Even after the pullback, Tesla still trades at 5.5 times sales and 19.5 times book value, which is insane compared to any traditional automaker. Volatility will be the name of the game for Tesla investors.
High risk also implies potentially high reward: If Tesla can live up to its growth ambitions, and deliver 500,000 cars per year by 2020 after successfully launching the $35,000 Model 3, then the premium could be justified. This is particularly true when you consider tangential opportunities in energy storage or other modes of electric transport. Investing in Tesla is absolutely not for the faint of heart.
Brian Feroldi owns shares of Tesla Motors. Evan Niu, CFA, owns shares of Tesla Motors. Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Halliburton and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.