There’s no such thing as an investment with zero risks. Regardless of how big a company is or how long it’s been in business, you must accept that shares could lose value if things go wrong. But why take on the risk of investing in stocks when there are safer places to store cash? It’s simple: Stocks can generate rewarding returns when things go right.
For the record, not all stocks are high-risk, high-reward. I believe there are low-risk, high-reward stocks and there are also high-risk, low-reward stocks. So don’t condition yourself to think that you must always assume exorbitant risk if you want to make money. You don’t!
That said, here are three risky investments that could pay off big time for patient shareholders.
1. USHG Acquisition
Special purpose acquisition companies (SPACs) have been popular investment vehicles over the past couple of years. These companies don’t have any business operations; rather, they raise money by going public in order to acquire another company. USHG Acquisition (NYSE:HUGS.U) went public in March with the intention of buying a business in the restaurant and hospitality space.
I believe all SPACs are high-risk investments before announcing a business target. For all we know right now, USHG Acquisition could acquire a real dud of a company. Moreover, it’s highly possible it could overpay to acquire a business. Consider that among the top 50 restaurant chains, according to Nation’s Restaurant News, over half are already public companies and 12% were recently taken private. That leaves a limited number of intriguing acquisition targets. And with roughly a half-dozen pre-merger restaurant SPACs already out there, there’s a chance for a bidding war for quality companies.
But USHG Acquisition has two things going for it that could make it worth the risk. For starters, Danny Meyer is on the management team. Known for his best-selling book Setting the Table, Meyer was part of the team that created Shake Shack, a company that went from just one location in 2004 to over 400 locations generating over $500 million in annual sales today.
Additionally, there may be room for opportunistic growth in the restaurant industry right now. The pandemic hurt many restaurants, and some will never recover. It’s not something that necessarily makes me happy. But chains that can afford to expand quickly right now can fill the void created from recent closures.
To summarize, we have no idea if USHG Acquisition will buy a great company at a reasonable price. But, armed with cash, Meyer and his team are in a great position to rapidly grow a restaurant business right now.
2. AquaBounty Technologies
Land-based fish-farm company AquaBounty Technologies (NASDAQ:AQB) is a unique business in the stock market. Its AquAdvantage Salmon are genetically engineered to convert feed into meat more efficiently than other animal-based proteins. And they’re grown in land-based tanks rather than plucked from the ocean. Up until now, the company has been experimenting with scaled-down versions of its farms to prove the concept. But it expects to construct its first large-scale farm later this year.
The risks for AquaBounty are numerous. First, the farm it plans to build could cost up to $175 million and has a payback period of up to eight years. But this already-lengthy payback period assumes genetically modified salmon find receptive consumers. While the company’s own research finds 70% of people will at least give it a try, a 2018 study from food and beverage industry consultants The Hartman Group found almost half of all consumers avoid genetically modified foods.
The next several years will also be expensive for AquaBounty, which adds to the risk. To truly provide a growing population with a more sustainable protein source, the company will need to build more than just one commercial-scale farm. In reality, it’s hoping to build five farms before 2028, which could cost $175 million each. In other words, it could be looking at almost $900 million just to build its business.
That said, AquaBounty is a small-cap stock with a market cap under $400 million as of this writing. If it builds five farms as it plans, and if it finds receptive consumers, then it believes it could be generating around $350 million in annual revenue. From there, AquaBounty would be established enough to kick expansion into high gear, possibly even building farms internationally.
It would be a long, risky journey for AquaBounty shareholders. But it’s possible for the stock to produce high returns over an extended time period, given how small the company is today.
3. Nano-X Imaging
Of all the stocks I own, none are more risky than medical-device company Nano-X Imaging (NASDAQ:NNOX), or “Nanox” as it’s commonly called. The company intends to commercially produce and distribute its primary product, the Nanox.ARC, which uses a different (and cheaper) process to create x-ray images for use by the medical industry. The product it is currently prototyping and hopes to soon distribute uses a differentiated business model that aims to generate revenue primarily through per-use licensing fees as opposed to hardware sales. The plan will forever disrupt the X-ray industry if it’s successful, and it could make for a home-run investment if everything goes right.
But there’s so much that could go wrong. Here are some of the biggest risks for Nanox stock:
- Valuation risk. The company’s market cap is almost $2 billion, but it currently generates zero revenue.
- Regulatory risk. Nanox recently received Food and Drug Administration clearance for its single-source Nanox.ARC device, but it’s just starting the process to get approval for its multi-source machine, which is the one it intends to commercialize.
- Production risk. The company has never manufactured machines at scale. There’s no telling how smoothly this process will go.
- Commercialization risk. Will doctors try a brand-new technology when they’re already comfortable with current X-rays? Will other players allow Nanox to just waltz in and make their X-ray machines obsolete without a fight?
If Nanox fails at any point in this process, there’s a chance for substantial downside with this stock. In a worst-case scenario, this could go to zero.
But the upside is enormous if all of these things go very right. In a little over three years, management believes it could have 15,000 machines deployed. And it already has contracts for 5,150, which could be generating almost $400 million in high-margin revenue on their own.
Not to mention, 15,000 machines would just be a starting point for a much longer growth story that could play out over the next decade and beyond. Furthermore, its Nanox.ARC will produce thousands of digital medical images. This could quickly turn into a huge and valuable data set, allowing computer analysis to uncover new medical insights that previous technologies didn’t allow.
When extreme risk can be worth it
I advocate for building a diversified portfolio over time. One of the overlooked benefits of diversification is that it allows you to take big risks now and again. After all, if you’re spreading your investments out, then you won’t suffer devastating financial losses when a riskier investment doesn’t pan out. But it does allow you to profit in the instances when a risky bet turns into one of the few great growth stocks.
In summary, I wouldn’t make USHG Acquisition, AquaBounty Technologies, or Nano-X Imaging a core holding in my portfolio at this time. But diversification allows me the opportunity to occasionally take small stakes in exciting companies like these.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
View more information: https://www.fool.com/investing/2021/04/29/3-high-risk-high-reward-stocks-add-your-watchlist/