7 High-Risk, High-Reward Stocks That Could Pay Off Big-Time

If you are looking for some excitement in your portfolio, you might be tempted by high-risk, high-reward stocks. These are the stocks that can soar to the moon or crash to the ground, depending on how the market perceives their growth potential and profitability.

Although the economy is in a relatively good state so far, there are recessionary fears even within the Federal Reserve, as the Fed minutes revealed. That’s concerning for high-risk, high-reward assets due to their cyclical nature. The underlying businesses can also face many headwinds due to the “growth at all cost” mentality causing a high debt load.

However, that does not mean you should avoid these stocks altogether. In fact, there are some compelling reasons to buy them in such an environment. For one, the increased scrutiny of such stocks might make them trade at depressed levels despite solid fundamentals. And these stocks can deliver remarkable returns when the market does start to rally. That’s not a far-fetched idea, with rate cuts on the horizon later this year and falling inflation. With that in mind, look into the following seven high-risk, high-reward stocks:

Upstart Holdings (UPST)

Upstart Holdings (NASDAQ:UPST) is among the most battered stocks after the selloffs that started in late 2021. Couple that with the recent turbulence in the financial sector, and you have a fintech stock trading 96% below its peak. Less than two years ago, this stock was soaring as its sales growth exceeded 250% year-on-year. What’s gone wrong?

For starters, the Fed’s rate hikes and recessionary fears have eaten into the company’s artificial intelligence-based lending model. Hear it from the CEO: “The Fed’s interest rate hikes, the fastest in several decades, left both lenders and capital markets cautious and concerned about what might come next in our economy…” He later stated that “…most of the decline in our business is because rates approvals are way down and rates are way up. And that’s largely due to higher levels of risk in the environment.”

Furthermore, banks are becoming more conservative toward risk as most anticipate a recession later this year. That’s even more bad news for Upstart.As for the “high-reward” catalyst, that’ll require some patience, but I certainly anticipate that happening. Upstart’s AI-based lending model has outperformed FICO, and near-term scares won’t keep its lending partners at bay forever. It is also at a very low valuation already and has a very high short interest rate which could lead to some explosive gains once the fears start to subside.

In essence, it will likely bleed or trade sideways for the next few months. But once rate cuts begin and the economy sees more growth, this stock won’t disappoint.

Direct Digital Holdings (DRCT)

Direct Digital Holdings (NASDAQ:DRCT) is an end-to-end advertising platform specializing in demand and supply-side commercialization. Much like most ad-reliant businesses, Direct Digital also feels the pinch as companies across the board reduce their marketing expenditure. Thus, it’s no surprise that the stock has languished for the past few months, down 57% from its peak in February.

However, there has been some good news about the company recently, and the stock surged nearly 18% before the market close. Direct Digital’s Q4 2022 earnings report beat estimates with $89.4 million in revenue and a 2023 guidance of $120 million at the midpoint. The advertising company has been delivering quite the growth in the past few quarters, but the recent surprise showed that it’s likely to continue through this year. Its future 3-5 year total revenue growth rate exceeds 54%, better than 98.6% of its peers. At the same time, its forward price-to-earnings ratio sits just below 9.5 times.

These metrics display that the business is rebounding much stronger than expected, and once companies up their marketing spend, I expect even more growth here. The average analyst estimates a 128.7% upside here by next year.

HashiCorp (HCP)

HashiCorp (NASDAQ:HCP) is among the fastest-growing high-risk, high-reward plays in the market right now. It’s a software company that helps developers, operators, and security professionals to efficiently manage cloud infrastructure. The company offers open-source tools and commercial products covering various aspects of infrastructure automation, such as provisioning, security, networking, and orchestration.

Despite the remarkable growth here, the cloud-computing has had little impact on HCP stock. That’s primarily due to the company’s focus on growth; a lot of money goes toward that goal. Thus, HashiCorp was left on the back burner as the Street pivoted to profitable businesses.

Regardless, it is well-positioned to weather the current cycle, as it has only $15 million in debt. The company has also started to shift its focus toward profitability recently, while its cloud business has seen impressive customer retention. Once HashiCorp improves its margins, I see a lot of upside ahead. Five-star analyst Ittai Kidron at Oppenheimer believes a 51% upside is possible by next year.

Asana (ASAN)

As I’ve discussed earlier, companies focusing on marketing and advertising have been facing tough headwinds in this environment. Asana (NYSE:ASAN) is among the worst sufferers, down 87%-plus from the peak, and bearish sentiments continue amidst slowing growth and increasing competition in the sector. Meanwhile, the company’s CEO owns 50% of the stock with plans to buy more. It’s definitely a very aggressive play, with analysts having very mixed feelings.

However, I believe going long on the stock is the best way to play it. The company’s shares are trading at relatively distressed prices, and there are no immediate cash constraints to jeopardize its future. Instead, Asana could turn a corner soon once the marketing industry gains momentum and the economy starts cooperating.

The biggest bull factor for me is the company’s CEO. Some may see the CEO’s 50% ownership as a bad thing, but I disagree. Dustin Moskovitz’s pockets are deep enough to pull Asana out of any trouble, and I believe he will do so as he has a vested interest in its future already. He also plans to buy $30 million shares over the next year, aiding ASAN’s price.

Superior Industries International (SUP)

Superior Industries International (NYSE:SUP) makes aluminum wheels for cars and trucks, and has been on a wild ride in the last 12 months as the company dealt with the fallout of the Covid-19 crisis, the global chip shortage, and the rising costs of aluminum. The stock hit rock bottom at $2.88 in October 2021 but has since bounced back to above $5 as of April 2023.

SUP stock looks compelling with the recent slowdown as it is a leader in its niche market, and it has a loyal customer base that includes both automakers and aftermarket retailers. The company is also making money and generating positive cash flow, which is impressive given the tough environment.

Plus, the company is not resting on its laurels. It is investing in new technologies, automation, and operational improvements to boost its margins and competitiveness. It is also tapping into the growing demand for electric vehicles, which require lighter and more efficient wheels. Still, it comes with a lot of risks. The company operates in a cyclical and cutthroat industry that depends on the economy’s health and consumer sentiment. If the auto sector slows down or faces more disruptions, SUP stock could lose its momentum and its valuation.

Cloudflare (NET)

Cloudflare (NYSE:NET) is a leading technology company that provides essential services for the Internet, including security, performance, reliability, and scalability. With its 96% market share in network security, Cloudflare has a dominant position in this market. Its popularity among businesses has continued to rise, as evidenced by its fast revenue growth of 40-50% year-over-year since its IPO in 2019.

Cloudflare’s services are most popular with smaller and mid-sized businesses as its cybersecurity solutions are easy to set up and run. These small businesses form a well-diversified and sticky customer base. It’s also a fast-growing sector with many businesses opening up online portals, while most startups these days are well-connected with the internet. Simply put, it dominates the cybersecurity space when it comes to small-to-mid-sized websites. At the same time, it is expanding into other network businesses as well, such as VPNs, carrier services, and network analytics.

With that in mind, I believe the company can substantially improve its top line despite the near-term headwinds. But the average upside potential, according to analysts, remains low due to mixed sentiments.

Wolters Kluwer (WTKWY)

Wolters Kluwer (OTCMKTS:WTKWY) stock has been on a strong momentum since the start of the year, gaining over 24.6% YTD and reaching an all-time high of $134 on April 13. The company has also successfully priced a new 700 million euro 8-year senior unsecured Eurobond on March 27, which will help it refinance its existing debt and optimize its capital structure.

The company faces some short-term headwinds due to macroeconomic conditions. It is a cyclical tech company, after all. But it still pulled in double-digit top-line growth of 14.4% last year. It’s not the flashiest of picks, but if you are into momentum stocks, it should more than satisfy.

On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.