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 (AAPL), Google (GOOG), and Bank of America (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.
Micron Technology, Inc. (MU), together with its subsidiaries, engages in the manufacture and marketing of semiconductor devices worldwide. The company has fallen on hard times, but it looks as though the expectations have really come down-- making MU a potentially nice turn-around company. Moreover, while the company may be speculative at a trailing 35x P/E, the future looks better at just an 11x forward P/E, along with cheap valuations at a .7x P/B, EV/S and P/S, and relatively cheap 2x EV/EBITDA. I think MU should trade higher in the coming months.
Banco Santander of Spain (STD) is a financial behemoth with over $45 billion in sales. With the ongoing financial worries of the European Union, this stock is getting clobbered. This is speculative as nobody knows for sure what will happen, but the value for the long-term investor as we’re describing here looks nice. Trading at just a .6x PEG, .7x P/B, 7x trailing P/E, 6x forward P/E, and a very nice 10.6% trailing twelve month dividend yield. I think STD makes for a nice speculative international buy.
Pacific Ethanol (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 recently. Since that time, it 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. Lastly, on Dec. 9, PEIX entered into an $8M private placement increasing ownership of their production facilities, indicating bullishness towards their business. I think PEIX looks like a decent speculative stock to buy.
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 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 at 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 that 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 9x P/E, .6x PEG, 1x P/S, and .9x 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.
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 51x P/E, forward 30x 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 ROE’s of 27% and 54% respectively. I think this is a very speculative buy, but can prove to be lucrative if China keeps up the strong growth rates.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.