Less than a month ago, I wrote a piece on InvestorPlace detailing five “lottery stocks” — or high-risk, high-reward stocks with huge long-term upside potential — that were worth buying because their risk-reward profiles were starting to skew strongly towards the reward side.
Normally, when you buy lottery ticket stocks, you hope all of them work out. But, realistically, you expect one or two out of a dozen to work, with the premise being that one big winner will more than offset multiple losers.
The lottery stocks I proposed in mid-November have fared much better than that. Four out of those five lottery stocks are up since then. All four of those stocks have posted gains north of 6%, while the S&P 500 is up less than 1% over that same stretch. One of the lottery stocks is up nearly 30%. And, one of them has nearly tripled.
Indeed, if you bought just 1,000 shares of each one of those lottery stocks back in mid-November (and consequently put down about $30,000), you’d already be up about $5,000 … in roughly three weeks.
That’s the good news. The better news? All five of these lottery stocks could go much, much higher in 2020. Yes, they should still be looked at as high-risk, high-reward investments that should only be considered by investors with a healthy risk appetite. But, as far as the lottery stock category goes, these are the cream of the crop heading into 2020.
Plug Power (PLUG)
% Return Since mid-November: -16%
Current Price: $3.15
Potential Future Price: $12 (for numbers behind this price target, please refer to my previous lottery ticket stock article)
Hydrogen fuel cell, or HFC, maker Plug Power (NASDAQ:PLUG) is a strong lottery stock worth considering because the HFC market is starting to show promising signs of enterprise adoption. That is, as businesses increasingly turn towards alternative fuel solutions, they are increasingly unimpressed by the long re-charge times and short ranges of electric vehicles. And some of these businesses are turning towards hydrogen cars (which have shorter re-charge times and longer ranges). If this trend persists over the next several years, and HFC technology becomes a viable second-fiddle in the alternative fuel world to electric battery tech, then Plug Power’s revenues, profits and stock price will all march materially higher.
PLUG stock has struggled over the past month. Shares are down more than 15% thanks to a public share offering. But, this offering does not alter the fundamentals at all. The enterprise HFC market continues to gain momentum, and recent weakness should be seen as an opportunity.
In 2020, Plug Power should continue to win over multiple enterprise contracts, the sum of which will sustain huge revenue growth. That big revenue will drive gross and operating margins materially higher, and potentially push Plug Power significantly closer to profitability. The closer this company gets to profitability, the more bulls will remain in control and the higher PLUG stock will go.
NIO (NIO)
% Return Since mid-November: +28%
Current Price: $2.30
Long-Term Price Target: $14
Chinese premium electric vehicle (EV) maker NIO (NYSE:NIO) is a pure play on the Chinese EV market. In a nutshell, China’s EV market is booming, and will continue to boom thanks to government support and growing consumer demand. As the Chinese EV market stays in boom mode, the premium EV market will grow, too. In that market, NIO and Tesla (NASDAQ:TSLA) are the best games in town. Because NIO has struggled over the past few months amid slowing economic activity in China, NIO stock isn’t priced to be a big player in China’s premium EV market at scale. Instead, it’s priced to be squeezed out of the market. But, more recent trends imply that NIO will survive and thrive in the premium EV market. If that happens, then NIO stock has huge upside potential in the long run.
NIO stock is up nearly 30% over the past month because company’s operational trends are improving. That is, throughout the first half of 2019, NIO’s delivery volumes were falling. But, that trend has reversed course. Over the past four months, NIO has reported rising delivery volumes. As delivery volumes have bounced back, so has NIO stock.
This rally will continue into 2020. All signs point to the reality that U.S.-China trade tensions will ease in 2020. As they do, Chinese economic activity will pick up, leading to a rebound in China’s auto and EV markets. A rebound there will help support continued growth at NIO, especially since the company plans to launch yet another new car next year. Continued growth in 2020 will lend credibility to the idea that NIO is in the early stages of turning into a dominant player in China’s premium EV market. As that thesis gains credibility, NIO stock will continue to rebound.
Stage Stores (SSI)
% Return Since mid-November: +168%
Current Price: $5.81
Long-Term Price Target: $10
Struggling department store retailer Stage Stores (NYSE:SSI) is worth looking at as a lottery stock candidate because it is in the early stages of a huge transformation that could change everything for its longer-term prospects. Specifically, Stage Stores is going from full-price retailer, to off-price retailer, by closing some of their full-price Stage Stores stores, and converting the rest into off-price Gordmans stores. Management is doing this because the off-price Gordmans stores are performing much better than the full-price Stages Stores stores, and because the off-price department store model has worked well in the face of increasing digital competition — see the success of TJX (NYSE:TJX) or Ross Stores (NASDAQ:ROST).
SSI stock is up a jaw-dropping 170% over the past month because early data from this pivot has been very promising. That is, Stage Stores converted 17 department stores to Gordmans off-price in the third quarter. Not coincidentally, comparable sales rose a whopping 17% in the quarter.
This transition is still in its early days. By year end, Stage Stores projects to have 158 off-price locations. By the end of 2020, it will have 700. That means that the bulk Stage Stores’ off-price transition will happen in 2020. That also means that the bulk of the financial benefit of this off-price transition (higher comps, higher revenues, higher margins and higher profits) won’t show up until 2020 or 2021. Because of this, the red-hot rally in SSI stock will likely continue into 2020.
Aurora Cannabis (ACB)
% Return Since mid-November: +7%
Current Price: $2.43
Long-Term Price Target: $16
The long-term bull thesis on Aurora Cannabis (NYSE:ACB) revolves around two central ideas. First, the global legal cannabis market will be huge one day. Today’s demand, black market competition and legislation headwinds will all die down over time. At the end of the day, consumers really like cannabis (almost as much as they like alcohol), and the market will inevitably adjust to win this huge demand. Second, Aurora has a compelling opportunity to be a sizable player in that huge market at scale, both because the company is already very big in the cannabis space, and because they have as much cannabis production capacity as anybody.
The intense selling in ACB stock has temporarily paused, and shares are up 7% over the past month for a few reasons. First, the House Judiciary Committee approved the Marijuana Opportunity, Reinvestment and Expungement Act (MORE) Act, taking the U.S. one step closer towards federal legalization of cannabis. Second, Aurora opened a flagship retail store in Edmonton (at North America’s largest mall), in a sign that retail expansion is gaining momentum. Third, Ireland approved Aurora’s CBD oil drops for certain medical purposes.
These positive developments will continue to materialize in 2020. U.S. legislation should creep closer towards the federal legalization of cannabis. Demand in the legal Canadian channel should improve, thanks to legal producer’s having more capacity, better distribution, an expanded retail footprint and a wider variety of products (edibles and vapes will be huge sellers in 2020). Meanwhile, progress will continue to be made on the international front. All together, the sum of these positive developments should drive a big rebound in ACB stock in 2020.
Stitch Fix (SFIX)
% Return Since mid-November: +6%
Current Price: $23.38
Long-Term Price Target: $64
Shares of personalized styling service Stitch Fix (NASDAQ:SFIX) have multi-bagger potential because this company is pioneering a new way of shopping that could disrupt the huge apparel retail market. The current apparel retail shopping model involves a lot of customer work — customers have to either go to a website or a store, peruse/try-on different styles, build a shopping cart of items and then do some editing of that shopping cart at the check-out. Stitch Fix is changing the shopping model by taking the customer work out of it. That is, Stitch Fix requires customers to just answer a few questions, from which Stitch Fix personally curates apparel items for customers, and then mails those items to the customers’ front doors.
Seems more convenient than shopping, right? It is. Sure, it costs more. But, not that much more. If anything has rung true in the internet era, it is that consumers are willing to pay up for convenience. As such, Stitch Fix has a compelling opportunity to disrupt the way consumers shop. If this disruption is successful, Stitch Fix will be a huge grower for a lot longer — they posted only $1.6 billion in sales over the past twelve months, and apparel retail sales measure $430 billion in the U.S. and United Kingdom alone.
And calendar 2020 could be a really good year for Stitch Fix. U.S.-China trade tensions are easing. Recession talk is fading. The global economic outlook is improving. At the same time, labor markets globally remain healthy, with pretty much everyone working and getting raises. All of these dynamics will converge in 2020, and push consumer spending trends materially higher. That will provide a lift to Stitch Fix’s operations, and the company’s growth trends could improve meaningfully in 2020.
As of this writing, Luke Lango was long PLUG, NIO, TSLA, SSI and SFIX.