Riskier investments could lead to outsized returns, which is why some investors are willing to allocate a percentage of their diversified portfolios to riskier stocks. Here are a couple of riskier stocks that could pay off big time down the road.
Northland Power
Northland Power (TSX: NPI) produces power from renewable and clean energy – namely wind, solar, and natural gas. It is a riskier renewable utility because it has about 3.3 GW in gross operating assets and about 1.1 GW of gross assets under construction (based on Northland’s equity stakes).
It has operating assets in Canada (about 37% based on gross operating assets), Europe (35%), Spain (17%), and the United States (7%).
The green power producer’s assets under construction are primarily in Europe (1,140 MW) and Taiwan (1,022 MW). Both are offshore wind projects. Specifically, Northland Power owns a 49% equity stake in a Baltic Power project that’s off the coast of Poland and a 30.6% equity stake in the offshore wind, Hai Long, project in Taiwan. So, it’s sharing the risk and reward of these projects with its investment partners.
It also has a battery energy storage project, Oneida, in Ontario that makes up about 22% of its assets under construction. In other words, its assets under construction will make up about 25% of its operating portfolio once they complete.
Oneida is anticipated to be in service by mid-2025. Once this starts contributing cash flows, the stock could start ticking up. This will be followed by its major projects – Baltic Power and Hai Long – that are expected to go into commercial operation in 2026 and 2027.
In the meantime, investors can enjoy a 5.2% dividend yield from the S&P investment-grade (BBB-rated) utility stock. At $22.95 per share, the stock is undervalued by about 24% with near-term upside potential of roughly 31%, according to the analyst consensus price target.
If things go smoothly for Northland Power, incorporating the monthly dividend, valuation expansion, and growth from investments, buyers today could make total returns of 13-19% per year over the next three years.
Open Text
Open Text (TSX: OTEX) is an acquisitive information management company. Since it was founded in 1991, it has made over 40 acquisitions, averaging more than one acquisition per year. Its mergers and acquisition strategy has been generally successful. For example, the stock delivered total returns of about 14% per year from the start of 2007 to the end of 2022.
At the same time, its earnings growth could be lumpy, especially when it makes massive acquisitions, such as the purchase for US$5.8 billion of Micro Focus in February 2023. This acquisition almost doubled Open Text’s size. An integration of the two cannot be an easy feat.
The tech stock is down 21% year to date. At $43.78 per share, it offers a dividend yield of about 3.3%. Analysts believe it is discounted by about 14% with near-term upside potential of more than 16%. If it turns around, buyers today could experience outsized total returns of 15-19% per year over the next five years.
