In a rising market, most investors usually pick popular stocks. However, popularity is not always an indicator of a sound stock. Sometimes, the winning investments are underdogs, so investors interested in diversifying their strategies may find value in allocating a small portion of their capital to stocks with a high risk-to-reward ratio.
While these stocks inherently come with elevated risks, the potential for substantial rewards can make them an appealing option for those seeking to add a higher-risk higher-reward element to their portfolios.
Upstart Holdings (NASDAQ: UPST)
Upstart Holdings (NASDAQ: UPST) is at the forefront of the financial technology sector, leveraging artificial intelligence (AI) to revolutionize lending through its innovative platform.
The company utilizes AI to analyze credit risk, attempting to displace the traditional credit score as the tool that determines whether consumers are creditworthy for loans, and makes money primarily from the fees it gets for referring successful loan applicants to its network of hundred partner banks and credit unions.
Underlying financials
Upstart’s financial journey showcases remarkable growth, with revenue soaring by 243% from 2018 to 2022, culminating in an impressive $802.5 million.
The company has been improving gross margins, reaching 48.9% in 2022, which is indicative of operational efficiency. However, the stock plunged more than 25% after missing top and bottom-line consensus estimates in its Q3 report a few weeks ago.
Revenue for the quarter came in at $135 million, down 14% year-over-year (YoY) and below the consensus estimate of $139.76 million. Total fee revenue was $147 million, a decrease of 18% year-over-year.
The stock has quickly recovered and is currently trading at $32.37 and is 20.96% up today, and 18.01% in the month.
Upstart loans underwhelmed in 2021-2022 but have improved in recent quarter, and a strong loan performance will be crucial to getting banks to work with Upstart more.
Investors considering the stock should remain informed about the broader economic landscape, and stay abreast of updates related to home and automotive defaults. A rise in defaults for these types of loans may indicate potential challenges for personal loans as well, suggesting challenging times for Upstart Holdings.
Upstart is a high risk to award stock, and investors should consider this prior to investing in the company. The company’s addressable market is worth trillions of dollars, so waiting until signs of an economic rebound to invest shouldn’t prevent great long-term investment returns.
Ulta Beauty (NASDAQ: ULTA )
Ulta Beauty’s stock experienced a surge on Friday following the release of the company’s financial results for the third quarter of 2023.
The company shares had risen by approximately 12%, and the stock is trading at $470.03 at the time of writing.
The robust performance can be attributed to the company’s Q3 net sales, which stood at nearly $2.5 billion, reflecting a 6.4% year over year (YoY) growth. The notable increase in net sales was primarily propelled by a 4.5% growth in same-store sales. Also, Ulta Beauty opened 12 new stores during the quarter, contributing to a modest uptick in overall sales.
Ulta Beauty’s Q3 gross profit margin was 39.9%, and its operating margin was 13.1%. Both of these profit metrics were down from the prior-year period.
Analysts predictions
A synthesis of projections from 20 analysts on TipRanks over the previous quarter indicates a 12-month average price target of $533.95 for Ulta Beauty.
This suggests a potential increase of 13.12% from its current price of 472.03 and a ‘Moderate Buy’ recommendation. Based on the last three months’ rating, ULTA has received 15 ‘Buy’ ratings, 4 ‘Hold’ ratings and 1 ‘Sell’ rating.
The stock’s price targets exhibit a range, spanning from a high of $620 to a low of $400.
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Source: https://finbold.com/potential-dark-horses-in-the-stock-market-for-2024/