Speculative investments should never make up more than a small portion of your portfolio, but with a little bit of luck they can result in large returns. Personally, I rarely have more than one speculative stock in my portfolio, because I don’t have a high tolerance for the volatility speculative investments can bring. Having said that, here are three speculative stocks that are on my radar:
1. Vmoto (ASX: VMT)
Vmoto makes electric scooters from its factory in Nanjing, China. Its major customer is Chinese scooter company Power Eagle. Vmoto makes scooters for Power Eagle in relatively large volumes, but the margin on this contract is quite low, at about 8%.
Vmoto also makes eMax branded scooters for customers in Europe, and has a distributor in the US. However, to date, the volumes for these markets have been insignificant. The turning point for Vmoto came earlier this year, when it began to sell its own scooters from its own retail stores in China. This move has allowed the company to become profitable, and it currently has six retail stores. It announced a profit of $192,000 for October, and predicts that it will earn $300,000 – $600,000 for the year to 31 December 2013.
Vmoto has only just opened most of its retail stores, so it is quite feasible for it to continue to grow monthly profits. In addition to this, the contract to supply Power Eagle allows for an increase in volume in 2014, and sales to other countries are gradually growing.
One concern I have with Vmoto is that the company recently raised capital from directors and sophisticated investors at a steep discount to the prevailing market price in order to make a non-essential acquisition. This raises the prospect that the company may not prioritise the interests of long-term retail investors, now that the company is finally profitable. In addition, I am wary of companies with their main operations in China, because corruption is more common there. As a result of these concerns I sold my Vmoto shares for a significant profit at the current price of 3.1c. However, the company remains on my watch list.
2. Global Health (ASX: GLH)
Global Health is a company that provides software solutions to satisfy the record keeping and administrative needs of the medical industry. Clients are divided into acute health (think hospitals) and non-acute (for example, a psychologist). While the acute health segment relies on large contracts, the non-acute sector has a broader client base, and the company achieved its maiden profit of about $1.1 million in FY 2013.
At a current market capitalisation of about $13 million, that isn’t particularly cheap. However, the company has given guidance of at least $1.5-$1.6 million profit in FY 2014, and around 80% of the company’s revenues are recurring. The company has not stated an intention to pay a dividend, and may expand overseas in the coming years. Therefore, it may be quite some time before shareholders receive a dividend from the company. At current prices, the company is trading on a forward P/E ratio of around 8.5.
3. Anteo Diagnostics (ASX: ADO)
Anteo Diagnostics has developed MixnGo, a “molecular Velcro” that sticks biological matter to non-biological matter. Its core customers are companies that develop immunoassays for pathology tests. An immunoassay is a test that measures the concentration of a macromolecule in a solution. The company believes its product can make such tests more accurate, as well as easier to manufacture and use.
In early November the company signed Heads of Terms with BBI Solutions, a leading immunoassay developer. Essentially, it looks a lot like BBI will end up using MixnGo to develop its tests. This means MixnGo could end up in all manner of tests, for example, home pregnancy tests. Estimates vary regarding what this would be worth for the company, but estimates start at about $10 million per year: the company would, in essence, charge royalties for the use of its product.
At the current share price of 15.5c, Anteo Diagnostics has a market capitalisation of about $120 million, which is a bit rich for me. Not that much has changed since the company had a share price of 6c, although the agreement with BBI seems to have been the catalyst for the rocketing share price. I wouldn’t buy shares while the hype is high, but once the excitement dies down, there may be a decent opportunity.
Investing in companies at the early stages of their development can be rewarding. Of the three companies mentioned above, only Global Health has reported a full year of profits and positive cash flow. It’s important also to consider whether the company is capital-hungry, or on track to return funds to shareholders in the near future. In my opinion, most of your portfolio should consist of established companies with at least some growth ahead, rather than speculative stocks.
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Motley Fool contributor Claude Walker (@claudedwalker) owns shares in Global Health.