3 High-Risk, High-Reward Stocks You Need to Know About

After being in the investment business for longer than I care to admit, surviving two nasty bear markets, experiencing the advent of the Internet, seeing more corporate scandals than I care to remember, and more, I’ve decided there are only two basic kinds investment mistakes — taking on too much risk, and not taking on enough risk. 

The latter may be more prevalent than you’d believe. 

#-ad_banner-#Granted, you start a portfolio with conservative holdings. If you’ve got that piece of your allocation in place, though, and now have some extra cash to take on more risk in search of bigger rewards, here are three aggressive stocks that could offer outsized gains.

1. Franklin Electric Co. (Nasdaq: FELE)
Investors who have never heard of Franklin Electric might assume it’s a utility company. Franklin actually makes electrical equipment — groundwater and fuel pumping systems to be exact. It’s far from being a riveting business, but what it lacks in pizzazz it makes up for in reliable growth.

Why now: There are a couple of different good reasons to own Franklin Electric right now, not the least of which are growing sales and profits. You just have to take a big step back and look at the bigger picture to see the growth potential for this stock. 

Last year’s top line of $821 million and bottom line of $63.1 million are both record-breakers for the company. Earnings are projected to swell by 14% this year after last year’s 61% improvement. Boring or not, that’s impressive growth many corporations envy. 

Investors can still count on earnings volatility going forward, but the results are impressive for those who can commit for a year or more. 

The other reason investors may want to consider stepping into Franklin Electric Co. now is a little less sophisticated: Shares are in a long-term uptrend and the well-paced rally shows no signs of stopping. 

2. Darden Restaurants Inc. (NYSE: DRI)

You may know this company better as Red Lobster or The Olive Garden — a couple of cliche casual-dining chains that are occasionally the butt of restaurant jokes. Those taking jabs at the company, however, may also want to realize the company is laughing, too — all the way to the bank.

Why now: When the recession hit in 2008, fine and casual dining were among the industries hit the hardest. Several moderately-priced eateries like Friendly’s Ice Cream, Bennigan’s, and Tony Roma’s have all faced financial difficulties since then, up to and including bankruptcy, as was the case with Friendly’s. 

While Darden Restaurants was lumped into the left-for-dead group at the time, the company has defied the skeptics by continuing its march into record earnings levels. In fact, had it not been for the mere 1.3% dip in fiscal 2010’s (mostly calendar 2009) revenue, Darden would have posted higher sales in seven of the past eight years. Profits have grown in six of the past eight years, and not once during that time has the company booked an annual operating loss. That’s not bad.

Granted, the past is no guarantee of future results. But after a long-term track record of sales and earnings growth — and during a time when many of its competitors were hitting a wall — it’s quite clear Darden has found a winning formula. 

3. Southern Copper Corp. (NYSE: SCCO)
Very few metal miners are pure plays. Southern Copper is no exception. But, as far as industrial metals are concerned, it’s one of the biggest and “most pure” copper plays investors can own.

Why now: It’s a bit of a misnomer that copper miners want to see sky-high prices. It’s nice for a while, but it can invite unwanted competition into the marketplace, and excessively high prices eventually lead to a supply glut and a subsequent meltdown of the entire copper market

Conversely, dirt-cheap copper leaves little room for margins, and that’s assuming anybody actually wants to buy the stuff. Sometimes there’s no price low enough to sell any meaningful amounts of it. 

Said another way, there’s a “sweet spot” for copper prices, where established miners can sell enough to be profitable, storage facilities aren’t getting backed up with oversupply and buyers are willing to pull the trigger. 

Right now, we’re in just such a sweet spot. The London Metal Exchange’s warehouse-stored copper supply reading hit a multi-year low in May, though it’s not at rock-bottom lows from 2007. This means the supply isn’t drained, yet it isn’t piling up on itself. Simultaneously, copper is currently priced at $3.50 per pound — the average price for the past five years or so — and is holding steady. It’s a stability (read, predictability) the copper market hasn’t seen in years and one that could last for years.

Add in the fact that Southern Copper has already managed to crank up the top and bottom since 2009 (growing the bottom line from 2009’s $929 million to last year’s record $2.3 billion) even before the copper market’s new stability materialized, and what you have is a proverbial perfect storm. 

Risks to Consider: The biggest worry here isn’t corporate performance, but in the way investors perceive these companies. As long as the economy remains stable, these three stocks should remain in favor. If the economy significantly sours, however, then these picks could fall out of favor rather quickly.

Action to Take –> Were all these stocks in the same industry, or even the same sector, choosing just one would be preferable. In this case though, these three stocks are different enough to where you may want to own a stake in them all. All three have double-digit upside for the next 12 months, supported by trailing as well as forecasted results.