For the young investor, sometimes playing it too safely is the most dangerous strategy. Leaving money in a bank account may seem really safe. However, when one factors in inflation, he will see that is a guarantee to lose money and puts one's retirement in serious question. Moreover, if one is too risky, betting it all on one stock, that can put one's retirement nest-egg in serious jeopardy as well.
I believe a small portion of your portfolio-- 10% or less-- is great for speculative growth companies. These can really juice your returns if they turn out to be successful, but won't destroy your portfolio if they don't pan out. Moreover, every blue-chip company we know of now, such as Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), and Bank of America (NYSE:BAC), were small growth companies at one point in time. This doesn't mean an investor should just pick a stock at random, and hope it transforms into the next mega cap company. Many of the current enormous companies showed great value throughout their growth history, and here are some names I feel meet that criteria.
Pacific Ethanol (NASDAQ:PEIX) produces and markets low carbon renewable fuels in the western United States. Recently insiders have been making some big purchases as I described here, and PEIX has continued to move higher. The company had a great earnings report and since that time paid off its costly $35M senior convertible notes and still trades at an attractive .1x P/S and .2x EV/S. Moreover, it was actually cash-flow positive this quarter-- and by a good amount of greater than $6M-- while beating analysts estimates these past 2 quarters by 14% and 183% respectively. I think PEIX has more room to run.
YRC Worldwide (NASDAQ:YRCW), through its subsidiaries, provides various transportation services worldwide. At one point, this was the largest trucker in the nation and is still massive with close to $5B in annual revenues. However, it has since fallen on very tough times, due mainly to very costly labor issues. In fact, bankruptcy seemed like the company's only option until it had an agreement earlier in the year that severely punished shareholders giving them only an approximately 2% ownership. The stock seems to have more than priced in that horrible news. The new management team looks focused on making a leaner company and aligning costs with its still sizeable revenue base, which-- at 2%-- still means the stock is trading at less than 1x P/S for equity holders. Moreover, the sizeable debt load of $1.3B should come down as costs have been cut and are expected to return to profitability. This is definitely the most speculative buy, but it has the potential to be a big winner with limited downside at this point.
Level 3 Communications (LVLT) engages in the communications business in North America and Europe. The stock just recently completed its big acquisition of Global Crossing and had a 1-for-15 reverse stock split to take it out of penny stock territory. The financial performance wasn't pretty, as it lost approximately $600M in net income this past year and has a sizable debt load of well over $7B. However, management expects great synergies by combining these two companies. This will not only cut expenses, but raise the anemic -16% and -0.5% profit and operating margins. Moreover, it's trading right near 1x P/S, and was nearly FCF break-even this past year. It should also be noted that accomplished value firms Southeastern Asset management owns just under 20% of the shares outstanding as of Sept. 30, along with Fairfax owning over 6% as of Sept. 30. This is a nice entry point for a speculative buy.
Jefferies Group (JEF) together with its subsidiaries, operates as a securities and investment banking company. It has been volatile of late, as some people have questioned the company's exposure to the European crisis. However, management has done an excellent job elucidating this misperception, and even pointing out they are slightly short European exposure, so this looks to be more noise than substance. Moreover, it has had some massive insider buying as I mentioned here. While I tend to stay away from financials that have had these questions swirl and cause irreparable damage, I'm willing to make an exception here, as not only is Leucadia so well-respected, but it has the financial muscle to easily orchestrate a buyout for the remaining shares. Moreover, the stock trades at a cheap trailing and forward 7x P/E, .5x PEG, .8x P/S, and .7x P/B. I'd buy Jefferies at these levels as a speculative buy.
Sprint Nextel (S), through its subsidiaries, offers wireless and wireline communications products and services to individual consumers, businesses, government subscribers, and resellers. The company has been volatile of late, as it is committed to buying 30M iPhones over the next four years, and investors are unsure if that big gamble will pay off. The operating performance has been anemic, as it lost just over $2.5B in net income this past year and has a big debt load of $18.5B. However, this can prove to be very lucrative as S is now the only major carrier to offer the iPhone with an unlimited data plan. Moreover, due to the company having such high depreciation of non-cash expenses, it was actually significantly FCF-positive (to the tune of $3B) this past year. I think this is a high quality speculative buy at these depressed levels.
Yandex N.V. (YNDX) operates an Internet search engine in Russia. Some call this the Google of Russia, since it is the dominant search engine in its country, but it trades at a pricey trailing 40x P/E, forward 24x P/E, and 11x P/S . This company does have a clean balance sheet as well, with no debt and close to $1.50/share in net cash. This company came in with a good earnings report this past month and has fantastic profit and operating margins of 29% and 35% respectively. I think YNDX is a nice speculative buy.
Baidu (BIDU) provides Chinese and Japanese language Internet search services. The company has been volatile of late, as Chinese stocks have been in general. The valuations are lofty at a trailing 48x P/E, forward 28x P/E, and 22x P/S. However, the company has a good balance sheet with not much debt and approximately $5/share in net cash. Moreover, it trades at a relatively cheap .9x PEG and sports fantastic ROA and ROEs of 27% and 54% respectively. I think splitting a position with YNDX would make sense if looking at this, since they have similar valuations and the play would give you free diversification into two growing world economies.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PEIX, JEF, S over the next 72 hours.