Five Risky Stocks with Big Potential Payoffs

William Spain MarketWatch May 28, 2011

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Weekend Investor

May 27, 2011, 12:01 a.m. EDT

By William Spain, MarketWatch

CHICAGO (MarketWatch) "” As the U.S. stock market enters its historically weakest six-month stretch between now and October, investors are seasoning portfolios with companies that promise steady, predictable earnings without gut-churning volatility. But don't give up all the spice.

Some of the market's most risky stocks also offer investors the best earnings growth potential. These companies have seen big ups and downs, taking shareholders on a financial and emotional roller coaster, but catching them when Wall Street is looking for a safer, if not smoother, ride is worth considering.

"Risky stocks are relatively cheaply priced within the market as investors are still rather risk averse," said Ian Scott, chief global equity strategist at Nomura International. But, he added, "This may change going forward to the benefit of those investors holding higher-risk stocks."

To find candidates, MarketWatch asked investment data firm FactSet Research to screen for U.S. stocks with market values of $1 billion or greater, with at least three times the volatility of the benchmark Standard & Poor's 500-stock index. /quotes/comstock/21z!i1:in\x SPX +0.41% .

But to make the final cut, a volatile stock also had to offer earnings growth over the next 12 months of 75% or more, based on analysts' consensus "” meaning that investors could expect to be compensated for the risk.

The stocks' volatility was measured by three-year beta relative to the S&P 500. Beta is a commonly accepted yardstick of risk (standard deviation being another), and shows how widely a stock deviates from the market benchmark. The market always has a beta of 1.0; the stocks in the FactSet series sport betas ranging between 3.5 and 4.7.

A stock with a beta of 3.0, for example, would generate returns that move, on average, three times that of the overall market. So if the S&P 500 gains 1% in a day, that stock would gain 3% "” and vice versa.

A risky stock can go a long way to boosting portfolio returns "” but of course the opposite is true, so most investors would do well to use this strategy sparingly.

"Everyone loves positive volatility," said Mark Balasa, chief investment officer at Balasa Dinverno Foltz, a wealth management firm. "But higher volatility does not ensure higher returns and we normally go to considerable lengths to reduce it."

Here's a closer look at five of the FactSet screen's high-risk, high potential stocks:

Meritor Inc. /quotes/comstock/13*!mtor/quotes/nls/mtor MTOR +1.13% is a manufacturer of drive trains and brakes for trucks, trailers and various specialty vehicles based in Troy, Mich. At the depth of the recent recession, the company saw sales sink by half in some markets. It slashed thousands of jobs and shuttered plants, cut pay and retracted profit targets.

/quotes/comstock/13*!mtor/quotes/nls/mtor MTOR 16.18, +0.18, +1.13% /quotes/comstock/21z!i1:in\x SPX 1,331.10, +5.41, +0.41%

While the stock was trading north of $20 in late 2007, by March 2009 each share fetched less than 50 cents. At one point, in a speech to a trade association, the company's chief executive said that "it is tough to be optimistic when the industry you serve appears to be collapsing around you" but added that he remained "positive" about the future.

His feelings turned out to be well-founded: Meritor has rebounded strongly, recently posting fiscal second quarter profit that was higher by a third on a 37% jump in sales while also raising its revenue outlook for the second straight quarter.

Looking ahead, prospects appear even brighter. Meritor's earnings per share growth over the next 12 months is expected to soar 894% over the last 12 months, according to FactSet. The stock's three-year beta is 3.7.

And although Meritor's stock, which crested at almost $23 earlier this year, has come back down to $16 and change as the company struggles with higher steel costs, it is still well above a 52-week nadir of $11.65 and boasts a three-year return of just under 16%.

2. Genworth Financial Inc.

Genworth Financial Inc. /quotes/comstock/13*!gnw/quotes/nls/gnw GNW +0.18% has also been among the most volatile on the market "” and remains so.

Prior to the market collapse of 2008-2009, shares of the mortgage and life insurer traded near $40 apiece before sliding to a buck and change by early 2009. Genworth shares "” which carry a three-year beta of 3.5 "” then climbed back to $20 by the middle of last year before taking another, albeit less precipitous, dive to the $10-$11 range today.

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FactSet data show Genworth with a projected 12-month EPS growth rate of 445% "” although those estimates may come down.

/quotes/comstock/21z!i1:in\x Add SPX to portfolio SPX S&P 500 Index 1,331.10 +5.41 +0.41% Volume: 0.00 May 27, 2011 5:10p var embeddedchart124732823Chart = new EmbeddedChart('#embeddedchart124732823', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:SPX'); jQuery.data($('#embeddedchart124732823').get(0), 'embeddedchart', embeddedchart124732823Chart); /quotes/comstock/13*!mtor/quotes/nls/mtor Add MTOR to portfolio MTOR Meritor Inc $ 16.18 +0.18 +1.13% Volume: 773,925 May 27, 2011 4:01p var embeddedchart63746582Chart = new EmbeddedChart('#embeddedchart63746582', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:MTOR'); jQuery.data($('#embeddedchart63746582').get(0), 'embeddedchart', embeddedchart63746582Chart); /quotes/comstock/13*!gnw/quotes/nls/gnw Add GNW to portfolio GNW Genworth Financial Inc $ 11.09 +0.02 +0.18% Volume: 2.79M May 27, 2011 4:00p var embeddedchart1643761964Chart = new EmbeddedChart('#embeddedchart1643761964', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:GNW'); jQuery.data($('#embeddedchart1643761964').get(0), 'embeddedchart', embeddedchart1643761964Chart); //$(document).ready(function() { var storywidth = $('#mainstory').width(); var maxwidth = storywidth; $('#maincontent pre').each(function (index, value) { var thiswidth = $(value).width(); if (thiswidth > maxwidth) maxwidth = thiswidth; }); var offset = maxwidth - storywidth; if (offset > 0) { var margin = 13; var blanketwidth = $('#blanket').width(); var contentwidth = $('#maincontent').width(); $('#blanket').width(blanketwidth + offset + margin); $('#maincontent').width(contentwidth + offset + margin); $('#mainstory').width(storywidth + offset + margin); } //}); Page 1 Page 2 Add Comment › · Recommend (2) · Post: Alert Email Print var OB_permalink= 'http://www.marketwatch.com/story/5-risky-stocks-with-big-potential-payoffs-2011-05-27'; var OB_Template="marketwatch"; var OB_widgetId= 'AR_1'; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ""; document.write(str); } Comments Screener Most Popular Most read Most commented Stock investors brace for next round of weak data 5 risky stocks with big potential payoffs U.S. stocks gain as Wall Street watches technicals Stocks to watch Tuesday: Lions Gate, Optimer College is a scam "” so let's make money off it Dollar index drops to more than two-week low Fed and bombshells: You make the call Consumer sentiment rises in May U.S. stocks gain as Wall Street watches technicals College is a scam "” so let's make money off it Breaking Insight U.S.'s MEMS gap is worthy of a Sputnik moment College is a scam "” so let's make money off it How to invest in the fastest growing marketplace ever Watch NetApp turn into a bubble stock An early-summer night's dream Find a Broker Partner Center » MarketWatch's Latest Tweets

"RT @MktwHulbert: An early summer's night dream http://on.mktw.net/k1rI3E" 3:53 p.m. EDT, May 27, 2011 from MarketWatch

"Perhaps the worst month of the year in terms of U.S. car sales skids to a close http://on.mktw.net/mCRAdP" 3:37 p.m. EDT, May 27, 2011 from MarketWatch

"U.S. stocks record fourth week of losses but post moderate gain Friday http://on.mktw.net/mGgKFy" 3:02 p.m. EDT, May 27, 2011 from MarketWatch

"$EBAY sues $GOOG for allegedly stealing trade secrets for mobile payment systems. http://bit.ly/jElEfh" 1:56 p.m. EDT, May 27, 2011 from MarketWatch

"Copper's looking a little more appealing now after dropping 11% from its record price three months ago http://bit.ly/koVXT1" 1:22 p.m. EDT, May 27, 2011 from MarketWatch

Featured Commentary » Next: Myra Saefong's Commodities Corner

Myra Saefong

Commodities Corner

Speed bumps clutter copper's landscape

Next: Robert Powell's Your Portfolio

Robert Powell

Your Portfolio

Why men are easy prey for investment scams

Next: Kristen Gerencher's Vital Signs

Kristen Gerencher

Vital Signs

8 tips for fun in the sun with less cancer risk

Next: Nick Godt's Market Medics

Nick Godt

Market Medics

Why the BRICS should get the top job at IMF

Next: Jon Friedman's Media Web

Jon Friedman

Media Web

"?Hangover II': Look for $100 million weekend

Next: Thomas Kostigen's Impact Investor

Thomas Kostigen

Impact Investor

State Dept. marries investing, diplomacy

Next: Howard Gold's No-Nonsense Investing

Howard Gold

No-Nonsense Investing

Small-cap run is done but cycle will return

Next: Al Lewis

Al Lewis

Al's Emporium

Tax dodging is no way to achieve tax savings

Next: Mark Hulbert

Mark Hulbert

On the Markets

An early-summer night"?s dream

Next: Brett Arends' ROI

Brett Arends

What Wall Street Won't Tell You

Look out, stocks called above intrinsic value

Next: Darrell Delamaide's Political Capital

Darrell Delamaide

Political Capital

Putting Republican fear to good use

Next: Jennifer Waters' Consumer Confidential

Jennifer Waters

Consumer Confidential

Drive like a race-car driver this summer

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Stock investors brace for next round of weak data

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:31760011:17p

Stocks to watch Tuesday: Lions Gate, Optimer

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:31759711:06p

Columbia State Bank assumes First Heritage assets

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:31759611:06p

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8c077dc4-5ad2-4f73-b9c3-a381c5fece05:31759911:06p

First Heritage 44th U.S. bank to fail in 2011

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:31759811:06p

First Heritage closing to cost FDIC $34.9 million

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175956:28p

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8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175936:11p

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8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175926:09p

U.S. stocks gain as Wall Street watches technicals

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175906:03p

Miller: Market will take choppy path higher

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175895:52p

NYSE composite volume logs lowest level this year

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175885:39p

Treasurys rise for week as economic outlook dims

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175875:35p

Mexican peso gains; key rate stays at 4.5%

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175855:32p

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8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175835:29p

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Texas governor mulls a run For months, Republican Gov. Rick Perry has said he's not interested in running for president "” but, in an about-face, he now says he's mulling it over. 148659 1251720000000 1251720000000

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Recipe for better eating Chef and author Alice Waters talks to WSJ's Alan Murray about throughtful eating and sustainable farming. "¢ Winewatch: Bill Foley's a thirsty buyer /conga/kiosk/wildcard1.html 148686 1241985600000 1242633600000

Investing

ROBERT POWELL'S YOUR PORTFOLIO Are you prey to investment fraud? It's easy to be a target for investment fraud. Do you know if you're at risk and what to do about it? "¢ Watch: FINRA's Gannon on fraud victims 148690 1254780000000 1254780000000

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College is a money waster James Altucher writes off higher education as a scam "” but he says money can be made in its bubble. "¢ Save a year's worth of college costs 148633 1305956100000 1306103700000

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THERESE POLETTI Seismic shift in publishing Digital shocks like the rise of e-readers and authors getting into self-publishing have plunged the book industry into upheaval. /conga/kiosk/commentary2.html 148509 1300190400000 1301490000000

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Hong Kong property at risk The reversal of a period of low mortgage rates in Hong Kong is taking place at a faster rate than had been expected, leaving property stocks vulnerable. /conga/kiosk/asia.html 148313 1305891300000 1305964800000

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JEFF REEVES The next hot IPO If you were salivating over LinkedIn and are even more excited over the prospect of an inevitable Facebook debut, here are five options to weigh. /conga/kiosk/commentary.html 148466 MarketWatch.com Site Index Topics Help Feedback Newsroom Roster Media Archive Premium Products Mobile Podcasts RSS MarketWatch on Facebook MarketWatch on Twitter Company Info Code of Conduct Corrections Advertising Media Kit Advertise Locally License our Content WSJ.com Barron's Online BigCharts Virtual Stock Exchange All Things Digital MarketWatch Community Financial News Online WSJ.com Small Business FINS: Finance, IT jobs, Sales jobs

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maxwidth) maxwidth = thiswidth; }); var offset = maxwidth - storywidth; if (offset > 0) { var margin = 13; var blanketwidth = $('#blanket').width(); var contentwidth = $('#maincontent').width(); $('#blanket').width(blanketwidth + offset + margin); $('#maincontent').width(contentwidth + offset + margin); $('#mainstory').width(storywidth + offset + margin); } //}); Page 1 Page 2 Add Comment › · Recommend (2) · Post: Alert Email Print var OB_permalink= 'http://www.marketwatch.com/story/5-risky-stocks-with-big-potential-payoffs-2011-05-27'; var OB_Template="marketwatch"; var OB_widgetId= 'AR_1'; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ""; document.write(str); } Comments Screener Most Popular Most read Most commented Stock investors brace for next round of weak data 5 risky stocks with big potential payoffs U.S. stocks gain as Wall Street watches technicals Stocks to watch Tuesday: Lions Gate, Optimer College is a scam "” so let's make money off it Dollar index drops to more than two-week low Fed and bombshells: You make the call Consumer sentiment rises in May U.S. stocks gain as Wall Street watches technicals College is a scam "” so let's make money off it Breaking Insight U.S.'s MEMS gap is worthy of a Sputnik moment College is a scam "” so let's make money off it How to invest in the fastest growing marketplace ever Watch NetApp turn into a bubble stock An early-summer night's dream Find a Broker Partner Center » MarketWatch's Latest Tweets

"RT @MktwHulbert: An early summer's night dream http://on.mktw.net/k1rI3E" 3:53 p.m. EDT, May 27, 2011 from MarketWatch

"Perhaps the worst month of the year in terms of U.S. car sales skids to a close http://on.mktw.net/mCRAdP" 3:37 p.m. EDT, May 27, 2011 from MarketWatch

"U.S. stocks record fourth week of losses but post moderate gain Friday http://on.mktw.net/mGgKFy" 3:02 p.m. EDT, May 27, 2011 from MarketWatch

"$EBAY sues $GOOG for allegedly stealing trade secrets for mobile payment systems. http://bit.ly/jElEfh" 1:56 p.m. EDT, May 27, 2011 from MarketWatch

"Copper's looking a little more appealing now after dropping 11% from its record price three months ago http://bit.ly/koVXT1" 1:22 p.m. EDT, May 27, 2011 from MarketWatch

Featured Commentary » Next: Myra Saefong's Commodities Corner

Myra Saefong

Commodities Corner

Speed bumps clutter copper's landscape

Next: Robert Powell's Your Portfolio

Robert Powell

Your Portfolio

Why men are easy prey for investment scams

Next: Kristen Gerencher's Vital Signs

Kristen Gerencher

Vital Signs

8 tips for fun in the sun with less cancer risk

Next: Nick Godt's Market Medics

Nick Godt

Market Medics

Why the BRICS should get the top job at IMF

Next: Jon Friedman's Media Web

Jon Friedman

Media Web

"?Hangover II': Look for $100 million weekend

Next: Thomas Kostigen's Impact Investor

Thomas Kostigen

Impact Investor

State Dept. marries investing, diplomacy

Next: Howard Gold's No-Nonsense Investing

Howard Gold

No-Nonsense Investing

Small-cap run is done but cycle will return

Next: Al Lewis

Al Lewis

Al's Emporium

Tax dodging is no way to achieve tax savings

Next: Mark Hulbert

Mark Hulbert

On the Markets

An early-summer night"?s dream

Next: Brett Arends' ROI

Brett Arends

What Wall Street Won't Tell You

Look out, stocks called above intrinsic value

Next: Darrell Delamaide's Political Capital

Darrell Delamaide

Political Capital

Putting Republican fear to good use

Next: Jennifer Waters' Consumer Confidential

Jennifer Waters

Consumer Confidential

Drive like a race-car driver this summer

2011 Lexus CT 200h: Toyota's best Prius yet

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3176037:00a

China PMI, India GDP in Asian spotlight

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:31760212:11a

Columbia buys failed First Heritage Bank

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:31760112:01a

Stock investors brace for next round of weak data

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:31760011:17p

Stocks to watch Tuesday: Lions Gate, Optimer

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:31759711:06p

Columbia State Bank assumes First Heritage assets

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:31759611:06p

First Heritage Bank of Snohomish, Wash., fails

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:31759911:06p

First Heritage 44th U.S. bank to fail in 2011

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:31759811:06p

First Heritage closing to cost FDIC $34.9 million

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175956:28p

Radio Update: Regulators check AT&T acquisition

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175946:16p

MarketWatch top 10 stories May 23-27

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175936:11p

At the NYSE, Larry Kofsky previews the coming week

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175926:09p

U.S. stocks gain as Wall Street watches technicals

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175906:03p

Miller: Market will take choppy path higher

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175895:52p

NYSE composite volume logs lowest level this year

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175885:39p

Treasurys rise for week as economic outlook dims

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175875:35p

Mexican peso gains; key rate stays at 4.5%

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175855:32p

Marvell leads tech gains; PayPal sues Google

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175835:29p

Optimer rises in after-hours following FDA drug OK

8c077dc4-5ad2-4f73-b9c3-a381c5fece05:3175815:28p

Financials gain; Goldman says buy Nasdaq OMX

Politics

Food and Wine

Investing

Higher Education

Commentary

Asia

Commentary

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Five Risky Stocks with Big Potential Payoffs

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