With lingering memories of the 2008 stock market crash and fears of economic turbulence ahead, many investors have been trying to play it safe lately, leaning toward defensive investments such as US Treasury bonds and dividend-paying stocks of giant corporations. But money manager Louis G. Navellier says it’s time for investors to come out of hiding—or at least to poke their heads out a little bit more and take some bigger risks.
Bottom Line/Personal asked Navellier why it’s wise for many investors to become a little more aggressive now and how best to do it…
CONDITIONS ARE RIGHT
Home sales are finally picking up…the Federal Reserve has stepped up its efforts to keep interest rates low and stimulate the economy…the European debt crisis has stabilized somewhat…and corporate earnings remain strong, although they may pull back a little.
All that is good for the overall stock market, which has seen double-digit gains this year, but it’s especially good for small-cap growth stocks. After trailing the Standard & Poor’s 500 stock index last year and for most of this year, the Russell 2000 Growth Index of small-cap stocks spiked in recent months, beating the index of larger companies by 1.5 percentage points from August 1 through September 30.
For investors willing to handle a little more uncertainty in their portfolios, the best path to big returns now is to invest in small-caps—those with stock market values of $1.5 billion or less. These stocks are more volatile, but they also have potential for greater returns. It’s best to focus on the companies that can deliver strong growth in sales and profits even if economic growth remains sluggish.
There are dangers, however. Growth at these companies often depends on a single product, service or major contract or just a few. And share prices for some of these companies tend to be at much higher multiples of their earnings than the price-to-earnings ratios (P/Es) at many bigger companies. If something goes wrong, there are limited sources of revenue to fall back on and their stock prices could plummet. You should put no more than 5% to 10% of the stock portion of your portfolio in this category of stocks.
WORTH THE RISK
All of these stocks have had powerful rallies over the past year, but they still have lots of room for further gains.
My favorite risky stocks now…
Air Methods (AIRM) is the largest emergency air transporter for people requiring intensive medical care and transportation either from the scene of an accident or from general-care hospitals. The company operates in 48 states under names such as Mercy Air and LifeNet. Recent share price: $119.37. One-year performance: 87%.*
Why it’s attractive: Recent quarterly earnings** are up by 217% and sales rose by 72%. The business is flying high because cash-starved municipalities and hospitals have outsourced more of their emergency services. The federal government’s overhaul of health-care insurance also will provide a major boost because universal coverage means that more consumers have the ability to pay for emergency services. Major risks: Bad weather can cause significant fluctuations in earnings because of the high fixed costs to maintain the helicopters and aircraft bases and pay crew whether or not they fly. Also, accidents scare away investors and knock down the stock price. The company has suffered three crashes and the deaths of 13 crew members and patients since 2008.
Cynosure (CYNO) develops minimally invasive treatments for cellulite, hair and tattoo removal, skin rejuvenation and scar reduction. The company holds 37 US patents and has customers in 60 countries. Recent share price: $26.36. One-year performance: 161%.
Why it’s attractive: Sales jumped 50% in the recent quarter, much of that due to the company’s wildly popular Cellulaze cellulite treatment technology. Physicians can use the laser technology to zap unwanted fat under the skin in the buttocks and outer thighs in one treatment. The company may have another blockbuster in 2013 when an over-the-counter light-based device for the treatment of facial wrinkles, developed in partnership with consumer goods giant Unilever, goes on sale. Major risk: Beauty treatments are notoriously faddish. Newer procedures may come along.
Hudson Technologies (HDSN) collects used chlorofluorocarbons such as R-22 (Freon gas) from commercial air-conditioning and refrigeration systems. It removes the contaminants and then resells the gas. Recent share price: $3.63. One-year performance: 210%.
Why it’s attractive: A temporary order from the Environmental Protection Agency (EPA) limits the amount of Freon that can be manufactured in and/or imported to the US this year. Shrinking supply and hotter-than-normal weather has led to soaring Freon prices. Major refrigerant producers left the reclamation market years ago because of its limited potential, leaving Hudson Technologies dominant. In the recent quarter, revenue rose 51% and profit rocketed to $5.1 million from $781,000. Major risk: The EPA has yet to establish production and consumption limits beyond 2012. Freon gas pricing—the key to Hudson Technologies’ growth—will continue to move higher at some point as production allocations and inventory stockpiles fall, but the timing and pace are difficult to predict.
Nam Tai Electronics Inc. (NTE), based in China, makes electronic components for companies including Sharp and Sanyo Epson. Recent share price: $10.72. One-year performance: 118%.
Why it’s attractive: In the recent quarter, net income jumped by 213% and revenue increased by 63% as the company expanded its production capacity at two factories that focus on making products for smartphones and tablet computers, the hottest segments of consumer electronics. Sales are expected to triple over the next year, thanks to a major contract that Nam Tai recently signed with Apple to make iPhone and iPad modules. Major risk: Nam Tai has tethered its future to Apple continuing to produce blockbuster products.
*Stock performance figures are for the 12 months through September 30, 2012.
**Unless otherwise noted, earnings and revenue gains are for the quarter ended June 30, 2012, compared with the same quarter one year earlier.
