Watch 3 high risk stocks for potential bargains

Chris Lau, Kapitall: When high risk stocks sell off, they offer potential bargains at their lows.

It is hard to reduce risk ahead of the curve, especially for stocks that move upwards, undisturbed. Pandora’s (P) stock is an example of a speculative play whose uptrend broke down quickly at the beginning of March, 2014.

Since then, the stock is down around 40 percent. Worry that the Ukraine-Russia tension will escalate and high valuations in various tech issues are some of the reasons the downtrend could continue.

Lower forecast

Pandora issued a second quarter revenue forecast that was lower than expected. The company expects revenue to be no higher than $218 million. The consensus estimate was revenue of $219.3 million. For the full-year, Pandora’s guidance is within consensus.

Demand for Internet radio service is still healthy. Pandora’s revenue is up 69 percent from last year.

In the application software space, former high flier Marketo, Inc. (MKTO) regained some lost ground after shares peaked in January, 2014 at $45. The company, which makes marketing automation software, issued second quarter guidance that was above consensus. Marketo expects to generate revenue of between $33 and $34 million. For the full year, the company expects to lose $1.00 – $1.06 per share. Analysts expected the company to lose $1.12 per share.

Buying at the bottom

Cirrus Logic (CRUS) is an example of buying based on low valuation that pays off. The semiconductor maker bottomed at $16.46 in the past year. Cirrus Logic reported first quarter revenue and earnings that exceeded estimates. Bullishness also grew when the company forecast gross margin will be at the high end of the 47% – 49% range.

Cirrus Logic’s revenue relies heavily on Apple (AAPL), which explains why its valuation is so low. To broaden its offering, the chip maker said last month it was buying Wolfson Microelectronics (WLFMF). This will take out a competitor and open opportunities in the MEMS microphone market. The acquisition will also help Cirrus Logic lower its reliance on Apple.

Bottom line

Investors are becoming less tolerant of risk. Stocks promising high growth but valued as such sold off and could continue to do so. Astute investors should be mindful that richly valued stocks may continue to correct.

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