Most investors agree that a portfolio should have both blue-chip stocks and high-quality growth stocks. However, it’s also necessary to have 10% to 15% of expose in your portfolio to high-risk high return stocks. It’s these stocks that can be healthy return catalysts.

To a large extent, these high-risk high return stocks come from the penny stock universe. I would classify these as fundamentally strong growth stocks that trade under $5. Of course, there are purely speculative stocks among penny stocks, but that’s not my focus. I would prefer to hold potential 10-bagger stocks that have a sound business model. If business developments remain positive on a sustained basis, these stocks can deliver 20x or 30x returns.

I believe that if industry tailwinds are positive, the high-risk high return stocks discussed can deliver 10-bagger returns in the next three to five years. Let’s discuss the reasons to be bullish.

Cronos (CRON)

Cronos (NASDAQ:CRON) is a Canadian company that markets and develops cannabis products. CRON stock has trended higher by 20% in the last month from deeply oversold levels. Assuming a scenario where cannabis is legalized at the federal level in the United States, CRON is poised for 10-bagger returns. Even if this scenario does not pan-out, the stock will rally from a deep valuation gap on positive business developments.

The first point to note is that Cronos has one of the strongest balance sheets in the industry. With $836 million in cash and short-term investments, Cronos is positioned for aggressive investments if industry tailwinds wane.

It’s also worth noting that the company has been pursuing cost cutting measures. The guidance is to deliver positive cash flows in 2024. Therefore, the financial flexibility will improve further. At the same time, Cronos continues to invest in research and development. As the product portfolio broadens, there will be room for growth.

Bitfarms (BITF)

Bitfarms (NASDAQ:BITF) owns and operates servers farms which primarily validate transactions on the Bitcoin (BTC-USD) Blockchain. For the year, BTC has surged by 86%. During the same period, BITF stock has skyrocketed by 280%. This is an indication of the potential the stock holds in a scenario of a sustained Bitcoin rally.

With a Bitcoin halving due in 2024, there are views that point to Bitcoin touching $100,000 by the end of next year. Assuming this holds true, BITF can be a 10-bagger stock sooner than expected.

There are two reasons to be bullish on this crypto stock. First, Bitfarms has a strong balance sheet. The company has reduced debt by $140 million in the last 10 months. Additionally, with $41 million in liquidity the company is positioned for aggressive mining capacity expansion.

Furthermore, Bitfarms is a low-cost miner. As of Q1 2023, Bitfarms reported direct cost of $12,500 for one Bitcoin production. The company is therefore poised for significant EBITDA margin expansion and cash flow upside. Excess digital assets can be deployed for further growth.

Polestar Automotive (PSNY)

Polestar Automotive (NASDAQ:PSNY) is a Swedish electric vehicle (EV) manufacturer. I believe that it is another high-risk high return stock that poised to be a 10-bagger in five years. After a correction of almost 60% in the last 12 months, PSNY stock appears to be rebounding and has trended higher by 20% in the last month. I believe that the worst is over for this EV stock.

Among the reasons to be bullish, Polestar has already initiated cost cutting measures. It’s likely that EBITDA level losses will narrow in the coming quarters. Polestar will require additional financing. However, I don’t see that as a concern for a company that’s still at an early growth stage.

It’s also worth noting that the commercial production of Polestar 3 and Polestar 4 will commence in the first half of 2024. The company’s deliveries growth guidance was revised on the downside for the year. However, if macroeconomic conditions remain favorable, I expect strong deliveries growth in 2024 and 2025. Additionally, operating leverage will contribute to sustained improvement in EBITDA.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.