When it comes to investing, people talk about what’s called a “margin of safety.” All that means is buying stocks for less than what they’re actually worth to compensate for the risks and uncertainty that comes with investing in individual stocks. Some companies face more uncertainty than others. For example, smaller, unprofitable companies in high growth industries typically face more uncertainty than larger, profitable companies in mature industries.
Why invest in those less-certain companies at all? Because sometimes, for patient investors, those less-certain companies may become the next Apple or the next Amazon.
So today, we’re looking at some smaller company stocks that Morningstar’s analysts cover, focusing on those with a high degree of uncertainty but with what we consider to be good, long runways for growth. We also think these stocks are trading at a decent margin of safety and are therefore growth stocks for aggressive investors to investigate further.
3 Growth Stocks for Aggressive Investors to Buy and Hold
Green Thumb GTII
Farfetch FTCH
Lithium Americas LAC
Our first growth stock for aggressive investors is Green Thumb GTII. Green Thumb produces and sells medicinal and recreational cannabis through wholesale and retail channels in the United States. It operates in 15 states with 18 production facilities, 77 stores, and seven brands. Green Thumb focuses on states with large populations and limited licenses, including Illinois, Massachusetts, New York, Florida, and Ohio. We don’t think the company has yet carved out significant competitive advantages, but we do think management has done an exemplary job with the balance sheet and the company’s growth strategy. What’s the biggest risk here? Mostly regulatory, in the pace and status of legalization of cannabis in the United States. We think shares are significantly undervalued, trading well below our fair value estimate.
Our second growth stock for patient investors is Farfetch FTCH. Farfetch is an online platform connecting sellers and buyers of personal luxury goods. Given its business structure, Farfetch doesn’t expose itself to unsold inventory risk. However, we don’t think that the company has yet built significant competitive advantages, given its small size and modest reach so far. Although the online luxury segment is still relatively fragmented, we think it could, at some point, be dominated by a few strong global players—and we think Farfetch has the potential to become one of those strong global players. What are the risks here? New competitors who could grab market share and changing consumer tastes are among them. So, too, is the possibility that investors will be less interested in offering financing to high-growth businesses such as Farfetch, which have negative free cash flows and rely on external funding. Farfetch stock looks undervalued to us, even accounting for these risks.
Our final growth stock for aggressive investors is Lithium Americas LAC. The company aims to become a low-cost pure-play lithium producer. The company has no current lithium sales volumes but is developing three resources that should eventually enter production—the first, by the end of this year. As electric vehicles become more mainstream, we expect double-digit annual growth for lithium demand. And we expect Lithium Americas to benefit as demand increases. For now, however, we assign the company a no-moat rating, given that it doesn’t currently have any projects in production and is not generating revenue. The risks here include project execution, volatility in lithium prices, and additional taxes from Argentina, where the company will produce lithium. However, we think the stock is undervalued enough today to compensate for those risks.
