We recently published a list of 10 High Risk High Reward Growth Stocks Stocks To Buy. In this article, we are going to take a look at where NVIDIA Corporation (NASDAQ:NVDA) stands against other high risk high reward growth stocks.
When it comes to making money on the stock market, most investors are typically attracted to growth stocks. Growth stocks are primarily identified by the price to earnings ratio (P/E) for those firms that are profitable. A higher P/E ratio compared to the industry multiple means that investors have already priced in future growth into the share price to an extent and any surpassing of investor expectations sees the share price appreciate. Since some firms, particularly those in the software as a service (SaaS) industry, reinvest their revenue into growth, their earnings are often negative. Subsequently, the growth potential of these stocks is evaluated by their EV/Sales ratio, and you can find more details by reading 11 Best Cloud Stocks to Buy According to Analysts.
However, while these metrics are important for evaluating stocks, they often do not cover the riskiest stocks that promise the highest returns. In theory, stocks with the lowest prices often carry a higher potential of 10x or even 100x gains. This is because their low prices and small market size both have a substantially larger potential for growth when compared to bigger firms. These returns typically materialize over the course of several decades.
For instance, after accounting for their stock splits, the three most valuable firms in the world were trading at $0.10, $0.11, and $0.04, respectively. In today’s post inflationary terms, this means that their shares started to trade at $0.19, $0.21, and $0.08 in the same order. As a result, these bottom barrel stocks at the time of their IPOs, have delivered 183,916%, 401,600%, and 256,975% in returns through price appreciation after their stock market debut.
In short, these 1,500x+ returns through price appreciations are what drive countless investors to flock to the stock market daily. Yet, these returns also mean that investors, particularly inexperienced ones or those on the retail side, fall victim to scams. In fact, along with offering the highest potential for returns, micro cap stocks are also the ones with the greatest number of scams. For instance, one common way in which stock brokerages target unsuspecting retail investors is through a chop stock. This practice isn’t illegal, but it involves the seller withholding key information from the buyer. A chop stock is a stock that a brokerage buys from a large shareholder at a deep discount and then sells to unwary buyers at market price which creates a conflict of interest for the selling party as it stands to significantly profit from any sale.
While there are no surefire ways to spot a chop stock, an investor should be on the lookout for stocks that their brokerages (or others) are selling at slight or medium discounts to the market price, and in case of the brokerages, not disclosing the commission made from the sale. The mantra is simple: If it’s too good to be true, it generally is. While all this sounds nefarious, it isn’t the only legal way that gullible investors are exploited on the stock market.
In fact, one of the more common and legal ways through which investors, particularly in smaller companies, are harmed is additional share issues by firms who are struggling to raise capital through profits or debt financing. Share sales, even though they provide investors an opportunity to profit via price appreciations, are less riskier than debt issues since in case a company becomes a gone concern, debt holders are required to be paid back first. Naturally, firms prefer them for these reasons, but the more shares are issued, the lower the value of existing equity becomes. Consequently, you are likely to see micro cap stocks in particular drop in prices after management announces additional equity raises.
Additionally, firms that are struggling operationally try to shore up their corresponding stock devaluation through reverse stock splits. These reduce the number of shares outstanding but also end up providing unwary investors with a false sense of comfort in seeing the value of their investments increase. Since the share price appreciation is unrelated to business fundamentals, it carries the risk of depreciation in the future if the firm fails to reverse poor performance. This fact is also backed by research from the University of Texas and Lamar University. After analyzing 1,206 reverse stock splits between 1995 and 2011, the research demonstrates that less than half, 500 or 41%, of the firms, were able to continue operations for five years or longer after the reverse split. Out of the other 59%, a whopping 80% were de listed from exchanges less than five years after the reverse split, for reasons that include bankruptcy. The remaining 20% were acquired, and for this subset, the median survival time post split was just 20.9 months.
There are some tips that an investor can use to avoid stock scams. For instance, one should never fall for a sense of urgency created by the seller, believe only in verifiable and raw numbers as opposed to ‘testimonials’ that promise quick riches, ensure that anyone selling an investment is a licensed finance professional, be on the lookout for effort free ways to quickly make massive amounts of money, and follow the principle of ‘if it’s too good to be true, it generally isn’t.’ Other warning signs of micro cap stock fraud include stocks of shell companies with little to no operations, heavy promotion of the stock as opposed to the actual business, sudden and rapid jumps in share prices and trading volume, and trading suspensions by the SEC.
Investment research websites, newsletters, emails, and even newspapers can all pitch micro cap stock scams. So just because the source appears credible doesn’t mean the underlying stock is as well. Finally, research is a non negotiable for any investment decision, and the SEC has listed several ways to conduct research. Yet, just because a firm regularly releases information doesn’t mean that it’s ripe for investment solely because of this fact.
With these details in mind, let’s take a look at some high risk high reward growth stocks to buy.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A close-up of a colorful high-end graphics card being plugged in to a gaming computer.
NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Holders In Q2 2024: 179
NVIDIA Corporation (NASDAQ:NVDA) is the world’s largest and most valuable GPU designer which also has exposure to the tangential data center networking, autonomous driving, and consumer and professional graphics industries. Its high performing GPUs have allowed NVIDIA Corporation (NASDAQ:NVDA) to become the third most valuable company in the world in terms of market capitalization. Its GPUs are one of the hottest commodities in the world, which provides the firm with a wide moat. However, their short supply and the rush in the industry to implement AI software have also forced companies to look for alternatives to NVIDIA Corporation (NASDAQ:NVDA)’s products. This has seen firms like OpenAI work with Broadcom to design NVIDIA Corporation (NASDAQ:NVDA) GPU alternatives. Additionally, the firm can see stricter action by the US government for purported abuse of market power as well as an AI slowdown or a GPU glut to create further headwinds for NVIDIA Corporation (NASDAQ:NVDA)’s shares that have lost 23% since mid June. However, the firm’s key competitive advantages because of its strong product performance and established demand for its products make NVIDIA Corporation (NASDAQ:NVDA) less risky than most of the stocks on our list.
Artisan Partners mentioned NVIDIA Corporation (NASDAQ:NVDA) in its Q2 2024 investor letter. Here is what the fund said:
“NVIDIA’s year-to-date dollar value increase is $1.8 trillion. That’s equivalent to the 2023 increase in US GDP, which is, of course, representative of the collective economic efforts of about 330 million people. NVIDIA’s market cap is now $3 trillion. So is the GDP of France.
Does this make any sense? We wish that we could definitively say that it doesn’t, given that we don’t own NVIDIA. But the answer is more complicated. The growth in revenue and profits at NVIDIA has been stunning. In the calendar year 2020, its revenue was about $17 billion. Estimates for 2024 are around $120 billion. Operating profit is projected to reach about $80 billion in 2024 versus $4.5 billion in 2020. NVIDIA’s revenue essentially represents the capital spending of a small number of very profitable, very cash-rich technology companies buying up the processors necessary to power artificial intelligence (AI) software programs. It’s an AI landgrab. In order for NVIDIA to sustain these levels of revenue or grow them from here, these AI investments must start to generate an ROI for those splashing out $120 billion a year. And if not generating an ROI in the near term, those companies must at least see the prospect of an ROI, a clear sustainable competitive advantage or a moat of some kind.”
Overall, NVDA ranks 1st on our list of high risk and high reward stocks. But our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.