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These 3 stocks could shoot the lights out

Regular readers will know that I make most of my money by investing in a wide range of stocks that have reasonably high risk/reward profiles, some would call them speculative. Mind you, that doesn’t mean I buy shares willy-nilly in the next big thing. In fact, I daresay the worst time to buy a speculative stock is when gossip forums are in love with them. The most common mistakes made by investors in somewhat risky small caps are:

1) Thinking that the more know you about a company, the less risky it is to invest in; and,
2) Failing to adequately consider the possible downside, or investing too much in any single company.

Some lucky people will invest heavily in the right risky stock, but others will choose the wrong one. You can avoid that worry by diversifying your portfolio. I aim to own 10 – 25 different stocks for the rest of my career, but anything less than eight is usually quite risky.

Some time ago I mentioned I’d bought Azure Healthcare Ltd (ASX: AZV) at 27.5c, and that risky investment has turned out well, with the company’s share price up over 70% on the back of strong profit growth.

Motley Fool contributor Peter Andersen has opined that he thinks there is plenty of value left, even at above 45c. I’m extremely hesitant to disagree with Peter because following his recommendations has made me good money. We even disagreed about David Jones Limited (ASX: DJS), and I turned out to be wrong! However, I tend to agree with those who think Azure is a hold, rather than a buy, at the current price of 48 cents.

Interestingly, key personnel (including the CEO) have been selling down over the last few months, at prices ranging from around 25c to 45c today. In any event, there’s no doubt the company – which sells monitoring and administrative systems to hospitals – is sure to benefit from healthy tailwinds for many years to come.

Another little company growing profits for shareholders is MGM Wireless Limited (ASX: MWR), which provides nifty roll-marking systems and apps that can track students’ whereabouts.

The core business is a system whereby schools and daycare centres can send mass-SMS messages to parents should the need arise. Although the company is somewhat vulnerable to its wholesale telecommunications providers, I really like the fact that it has an existing commercial relationship with so many schools, its business is scalable and the services are sticky.

The company has just gone into a trading halt “pending release of an announcement regarding the award of a contract by a state education department.” Cross your fingers for me – I hold shares in this one too, bought at around the current price of $1.20.

I have also previously mentioned medical device maker Nanosonics Limited (ASX: NAN), which despite earning plenty of revenue, is yet to record a full year net profit. Although gross profit is following a pleasing trajectory. 

Furthermore, I’ve probably been a bit too slow to appreciate the fact that at a certain point, hospitals will likely rush to buy the company’s Trophon EPR product, which offers a superior way to sterilise ultrasound probes. Infection arising from inadequately sterilised probes literally kills people, and given the litigious culture in the USA, it seems likely hospitals will move to minimise the chances of being sued. 

Please Note: If you're a long term investor, there's usually room for a risky holding in your portfolio, but core holdings should be well established businesses, that can afford to pay a dividend.

Might I therefore recommend, this growing company which pays a whopping grossed up dividend of over 6.2% and has already proven itself with 7 years of growing profits.

Indeed, not too long ago, directors also bought shares and the CEO owns over 15%! However, the share price has crept up a bit lately, so discover this stock now, before it's too late.

Motley Fool contributor Claude Walker (@claudedwalker) owns shares in MGM Wireless and Azure Healthcare.

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