These 2 Stocks Carry a Lot of Risk, but Their Upside Is Huge

There is hardly such a thing as a risk-free investment, whether in the stock market or elsewhere. However, some opportunities carry more risk than others. In equity markets, small-cap stocks are perceived as less secure than large-cap stocks — and with good reason. Smaller companies generally have less stable sources of revenue and are often unprofitable.

The flip side is that small-cap stocks sometimes carry colossal potential, provided they can execute their master plan successfully. With that in mind, let’s look at two relatively risky small-cap stocks that could be worthwhile investments if everything goes well: bluebird bio (BLUE 0.42%) and Planet 13 Holdings (PLNH.F 2.06%).

BLUE data by YCharts

1. Bluebird Bio

Bluebird Bio is a biotech that seeks to develop therapies for rare illnesses. The company’s gene-editing approach has the potential to unlock innovative treatments (or cures) once only imagined by scientists. The biotech isn’t just all talk, either, as it had earned approvals for two of its products in Europe before deciding to exit the market last year. It recently earned the green light in the U.S. for Zynteglo, a gene-editing medicine for a rare blood disorder called transfusion-dependent beta-thalassemia (TDT).

Bluebird is awaiting word from the U.S. Food and Drug Administration (FDA), which is considering eli-cel, a potential therapy for cerebral adrenoleukodystrophy. A committee of experts convened by the FDA to discuss the merits of eli-cel strongly supported the treatment’s approval, which means it is very likely to get through this final regulatory hurdle. The FDA should make a decision on eli-cel by Sept. 16.

Bluebird’s gene-editing platform, and its proven ability to develop novel therapies, make investing in this company intriguing, and the long-term upside could be massive. That’s especially the case considering Bluebird’s current market cap is just $527 million. But there are risks to consider.

First, it’s worth noting that Bluebird decided to exit the European market because third-party payers were hesitant to cover Zynteglo due to its exorbitant price. Zynteglo will cost $2.8 million in the U.S., and Bluebird could encounter similar pushback from insurers there. Second, gene-editing treatments like Zynteglo are complex to administer, and Bluebird has to partner with those facilities that are capable of doing so.

This factor could severely limit the therapy’s reach if there aren’t enough patients for TDT — an already rare illness — close enough to qualified treatment centers. Third, Bluebird has dealt with financial troubles this year, and although it has initiated cost-cutting measures to extend its cash runway, investors should keep this in mind considering revenue from Zynteglo won’t start flowing in immediately.

With all of those issues ahead, Bluebird looks like a biotech company only  investors comfortable with risk should consider. 

2. Planet 13 Holdings

Shares of Planet 13 Holdings have dropped like a rock over the past year, along with the broader cannabis sector. There is no doubt that worldwide troubles such as inflation, geopolitical tensions, and supply chain issues have played a role, and the effects of these macro headwinds are showing up on Planet 13 Holdings’ financial results. Economic troubles are impacting tourist spending, which is harming revenue in the company’s superstore strategically located in Las Vegas.

In the second quarter, Planet 13 Holdings reported revenue of $28.4 million, dropping 13.5% compared to the year-ago period. In addition, Planet 13 Holdings remains unprofitable, although the company’s net loss during the second quarter of $2.6 million was a bit better than the net loss of $5 million reported during the prior-year quarter. Still, dropping revenue growth rates and red ink on the bottom line don’t add up well for any company.

That, combined with the competitive nature of the cannabis industry, does not paint a rosy picture for Planet 13 Holdings.

However, the company could have a bright future if it can pull off its vision to open multiple superstores in major cities in the U.S. What attracts many customers to Planet 13’s Las Vegas superstore is the experience, since they can witness the company’s production facilities, grab a cup of coffee (or a full meal), and buy souvenirs. Of course, Planet 13 also offers actual marijuana products, such as cannabis flower, edibles, vapes, and more.

As the company argues, Americans tend to prefer experiences over products. Thus, Planet 13’s different approach could help it carve out a solid niche in the expanding marijuana industry. According to some estimates, the sector will record a compound annual growth rate of 25.5% through 2030. Planet 13 Holdings has been able to maintain a more than 9% share of the Nevada market, no doubt partly thanks to its superstore.

The company could become a major player in this lucrative industry if it can execute.

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