Just under a month ago, I took a small part of my portfolio and threw a proverbial dart at a small Canadian growth stock named Lightspeed POS Inc. (TSX:LSPD).
While I am primarily a believer in employing a strategy of investing in stable, dividend-paying stocks that are trading at a point of good value, I also like to take a portion of my portfolio, no more than 5-10%, and swing at the fences on growth stocks, options, or trying my hand at shorting.
These opportunities are my attempt at making outsized returns in short order or, as is sometimes the case, suffer losses on these riskier bets. It’s the potential for losses on these long-shot investments that motivates me to keep the positions limited to a small portion of my portfolio.
While I do consider these types of stocks to be long shots in the context of my generally conservative portfolio, I do not make the choices lightly.
Lightspeed, for example, is not a random selection. Although it is higher on the risk spectrum than most of my other investments, I selected this company due to the fact the following three reasons keep it slanted towards upside potential rather than downside risk.
Lightspeed is in a growth sector
The point of sale (POS) sector of the market is experiencing explosive growth as stores, restaurants, and online businesses seek to automate and customize as they continue to move into the digital age.
Lightspeed provides hardware and services that give customers an integrated way to do so, by providing payment and inventory management solutions to its customers.
The company tracks customer purchase histories to maximize sales, allowing for payments from multiple devices and sources in an updated fashion.
Its earnings and business growth is significant
None of this would be useful, though, if there wasn’t proof that Lightspeed was growing as a company as well. Its total revenue grew by 51% year-over-year, as noted in its Q2 2020 report. Even more important, it grew its recurring revenue by 52% Gross margins were solid at 66%.
Of course, you have to take these results with a grain of salt. The stock is trading on growth, not absolute numbers. At present, the stock has a market capitalization of 2.93 billion, and its 2019 annual revenues were only $77.5 million. The company also posts only earnings losses at the moment, which is why this company is bought and sold on growth, not value.
The company is growing organically and through acquisition, though, so growth should continue for some time. The recently-announced acquisition of Gastrofix, a POS business that fits well within Lightspeeds restaurant-focused POS was received favourably by investors. It also helps it solidify its position as it continues to grow internationally.
The company has a solid balance sheet
Probably the best aspect of this company is its debt-free balance sheet, which it proudly presents in its latest quarterly report. As much as we all seem to love debt these days, companies without significant debt have more staying power as businesses, in my opinion, as they can weather economic storms more healthily than their heavily-leveraged contemporaries.
The Foolish takeaway
Since I purchased this stock a while ago, Lightspeed’s stock has increased by about 25% in value. In December, I wrote that Lightspeed could double in value in 2020.
I still hold the stock with the belief that this could occur. These stocks are not for the faint of heart, though, and I am afraid I am probably more fainthearted than most. If this stock drops to 20% my initial entry point of around $32, I will likely abandon ship.
Right now, my target is for a double on the stock, at which point I will evaluate whether to continue to hold my position or lock in the gains. Barring significant slowing in its reported growth, it is likely that this stock will meet this goal.
The recent gain in this stock is exactly the reason why it can be a good strategy to take a small amount of money and put it into a small speculative name.
Make sure, however, that you choose a stock that, in spite of its speculative nature, you have researched enough to take an educated guess on its success.
