The New Zealand Stock Exchange (NZX) is home to a diverse range of companies, offering investors a mix of low, medium and high-risk investment opportunities. In this article, we will be looking at three high-risk buys on the NZX that we believe have the potential to deliver strong returns for investors who are willing to take on additional risk.
Tourism Holdings Limited (THL)
Our first pick is Tourism Holdings Limited (THL), a leading provider of campervan and motorhome rentals in New Zealand, Australia and the USA. We believe that THL is attractively priced and well placed to benefit from the recovery in international travel, particularly in New Zealand. With the recent acquisition of Apollo, THL’s medium-term outlook is looking decent.
While THL requires some investment to replenish its fleet levels (~$120m in capex guided), we believe earnings will be skewed back towards the higher margin rental business. However, THL is not without risk. The company’s high-risk rating is partly due to market volatility as well as the temporary downside risk if the Apollo deal does not go through. Given the deal going through is only partially priced in, there is potential for a negative impact on the stock price.
Rakon Limited (RAK)
Our second pick is Rakon Limited (RAK), one of New Zealand’s leading technology companies. Rakon is a key beneficiary of the global trend towards more 5G infrastructure being built, which is a clear trajectory. However, Rakon has underperformed the tech-forward NASDAQ despite being a profitable tech company, which is a concern.
We believe that a catalyst for Rakon could be the company instituting a dividend. Shareholders have been advocating for a dividend for some time, and we agree that it would be a positive signal to the market. A dividend would also demonstrate the company’s strong balance sheet and positive cash flow to a market which has historically been weary of technology companies.
Pacific Edge Limited (PEB)
Our final pick is Pacific Edge Limited (PEB), a New Zealand-based cancer diagnostic company. While we like the growth potential of Pacific Edge, we acknowledge that the potential loss of the Novitas Coverage would stall the growth trajectory and impact revenue adversely. As a result, we rate PEB as a high-risk buy with a medium-term downside.
Pacific Edge shares have been hit hard due to the recent rise in interest rates, as well as Covid hampering anticipated growth plans. However, we still believe in the fundamentals of the company and the large addressable market it can penetrate into. We hope to see more promising updates 3-12 months from now and rate PEB as a BUY at current levels.
Conclusion
While these three stocks carry additional risk, we believe that they also offer investors the potential for strong returns. For investors who are willing to take on additional risk, we believe that THL, RAK, and PEB have the potential to deliver attractive returns over the medium to long term.
Investing in ASX bank stocks may have its ups and downs, so it’s more important than ever to invest in stable and well-managed companies in the financial sector. Westpac, ANZ, and Macquarie Group are all strong contenders for your investment dollars, each with their own unique strengths and risks. Whether you’re looking for an attractive dividend, a sound loan portfolio, or exposure to infrastructure and markets, these three ASX bank stocks are definitely worth considering in 2023.
