High risk CAN bring great rewards

 

Ask a lot of investors who are new to investing to list their biggest fears, and chances are that somewhere on the list you will hear ‘volatility’ mentioned. It makes sense that would be the case because we want to believe that the stocks we purchase should always rise. As every seasoned investor knows, and as all beginning investors will soon find out, this is not the way the market works.

Volatility is a frightening concept but it is a not the worst thing in the world to experience a little volatility. You have to remember that risk and reward run hand-in-hand. The higher risk you are willing to tolerate, the higher the potential reward at the end of the rainbow. Of course the knife cuts both ways, and you can just as easily wind up with a big loss on your hands at the end of the day.

This is the game we play. As investors, we have to be willing to assume some risk. Your risk tolerance may be higher, or lower, than mine but every investor risks their money daily when playing the stock market. That is reality.

Volatility can cut both ways, but if you time your purchases right, high volatility stocks can bring serious gains into your portfolio. This week we want to look at five volatile stocks that look ripe for the picking right now.

I cannot emphasis enough, that volatility brings with it risk. Not all of the following stocks are going to have the prettiest charts you have ever seen…. they are not supposed to, they are volatile stocks, and you have to remember that when it comes to volatility the pendulum has to swing both ways. These stocks are not for the faint of heart. If you are looking for nice safe investments, you may want to look elsewhere, but if you like to roll the dice and take on some extra risk in hopes of a juicy payday, then these stocks are just for you.

Chevron

It comes as no surprise that oil and gas giant Chevron (CVX) has been volatile as of late. Like most oil and gas companies, Chevron reacts closely to the fate of oil prices, and the significant drop in oil prices that started last summer really put pressure on CVX stock. The good news is that oil has started to rebound, and so has CVX. Because of the wild ride the stock has been on over the last year, the stock's volatility currently stands with a beta of 1.2. What I like the most about CVX is that the stock's volatility is a little high, but the valuation is very low. CVX currently has a P/E of just 10.8. The downside appears to be very limited while the upside is substantial should oil continue to rally into the summer months. Low prices have reduced rig counts in the U.S., and the ever-present tension in the Middle East should help oil continue to rally. I would not look for oil to make huge gains but the worst seems to be over. Now is a great time to get into oil and gas stocks at a very low valuation.

Charts courtesy of www.stockcharts.com 

Las Vegas Sands

We previously compared investing in highly volatile stocks to “rolling the dice.” It is only fitting to have one gaming company in our list, and I’ve chosen Las Vegas Sands (LVS). LVS has a beta of 1.76 so there is plenty of volatility in the stock. Casino stocks have been volatile lately due to weakness in the gaming industry, and concerns over slowing revenue growth in the new epicenter of gambling, Macau. LVS recently reported disappointing first quarter results, missing on both the top and bottom line, but analysts have pegged the company to grow earnings by 10% next year. The company generates a large chunk of its revenues from Asia, with only around 12% coming from its Las Vegas properties, so China is of crucial importance. There are concerns over the future of gaming in China, particularly in Macau as the government cracks down on corruption. However, the CEO of LVS, Sheldon Adelson, dismissed those concerns in the recent earnings conference call stating that he is confident in the region's long-term viability as income from China increased by 27.2% compared to last year. The company plans to reinvest in its casino-hotel properties in Macau. Analysts expect 10% earnings growth next year, and the stock has a low P/E of 16.3. This stock has high volatility and high risk. Meanwhile, the payoff could be huge for investors willing to jump in at the current valuation.

Charts courtesy of www.stockcharts.com 

Amazon

E-commerce giant Amazon.com (AMZN) can be one of the more volatile stocks in the market, but volatility is not running that high on the stock right now, and with a beta of 1.36 the stock's volatility is less than some of the other stocks in our group. Amazon is an interesting company in that analysts have historically opted to focus more on the company's future growth potential than on the company's actual earnings power. Last quarter the company actually lost 12 cents per share, but the results were a penny better than expected, and revenue was also higher than the consensus, which sent the stock price shooting higher. What has Wall Street really excited about the stock is Amazon’s cloud services which operate under Amazon Web Services (AWS). Revenue in the first quarter for AWS soared 49% versus the same period last year, as more customers move to keep data on the “cloud.” The company's CEO, Jeff Bezos, stated that the division's growth rate continues to accelerate and the company has been expanding into higher-margin cloud services. The segment has a profit margin of 17%, which is high enough that the company can cut prices even more if it needs to in order to compete. AMZN has a lot going for it and while the company has yet to string together an impressive number of profitable quarters, it continues to grow. Wall Street will continue to reward AMZN for growth and once the company is able to maintain profitability the sky is the limit.

Charts courtesy of www.stockcharts.com 

Discover Financial

There has been a lot of volatility in the payment-processing sector lately, with Discover Financial (DFS) currently earning a beta of 1.29. The company's first-quarter numbers were decent with earnings topping the consensus by a penny and revenue in-line with the consensus estimate. Revenue was up year-over-year but earnings were slightly lower than the same period last year. The stock's valuation is very attractive, with a P/E of just over 12, and analysts forecast 10% earnings growth net year for the company. The state of the overall economy will play a major role in where the stock moves from here. If unemployment remains in check, gasoline prices remain reasonable, and the housing market does not crumble, then consumer confidence should remain at or above pre-recession levels. This leads to higher consumer spending, which is a big reason why analysts expect 10% earnings growth for the company next year. The payment-processing sector is very cutthroat, and companies are going to need to keep growing their marketing expenses while at the same time adjusting their rates in order to remain competitive. Discover has been beefing up its marketing budget to compete against Visa (V) and MasterCard (MA), and in the long-run this strategy will work in the company's favor. Last quarter credit card loans rose 5.1%, so the marketing appears to be working. The valuation is very low, especially when compared to Visa and MasterCard, both of which have P/E ratios slightly higher than 29. There is no questioning DFS is a volatile stock in a tough industry. Given the low valuation it feels like a safe play at the current time, especially considering next year's 10% forecast earnings growth.   

Charts courtesy of www.stockcharts.com 

TripAdvisor

Online travel company, TripAdvisor (TRIP), has been rather volatile over the last year, and has a beta of 2.04. Following the company's fourth-quarter report in February, shares shot sharply higher, but have been trending lower in the months following the report. Improvements in the overall economy have helped the company grow earnings which were up 66.7% year-over-year in the fourth quarter. Looking ahead analysts expect the company to continue to grow, at a blistering pace, with earnings expected to rise 29% next year. The stock's valuation is a bit high, with a P/E of 50.1, but when you consider the massive earnings growth that Wall Street expects from the company, the valuation makes perfect sense. The recent fall in gasoline prices has boosted the amount of discretionary income people have to spend. Much of that income will go to travel which should help keep online travel sites such as TripAdvisor growing. TRIP is a volatile stock with a high valuation. However, if you take a long term look, and consider the impressive current and future growth numbers, this volatile stock could produce very solid returns for investors willing to jump on board.

Charts courtesy of www.stockcharts.com

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.


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Michael Fowlkes

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.

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