Welcome to my laboratory. It might not be obvious from the number of stocks in the Profit Catalyst Portfolio, but I analyze hundreds of equities each week. Many are easily tossed in the waste bin—those that are losing money or suffering declining earnings—while some teeter on the edge of recommendation. These are the stocks you’ll find in the Sandbox.

I have extremely high standards for the names selected for our portfolio. Although Wall Street typically loves the higher return on capital that high debt can produce, I dislike the risk of interest eating up all the profits if a business hits a rough patch. Some names in the Sandbox have just a tad too much debt for my taste. Often, I find stocks where everything looks great except the valuation. These names are also in the Sandbox. Just because I think the valuation is too high doesn’t mean the stock won’t go up. Sometimes estimates “grow” into the stock’s valuation.

Rating Risk

To help you weed through the names, I’ve included a risk rating. This is a simple 1 through 5 scale, with 1 carrying the lowest risk and 5 indicating a stock with extremely high risk. Most of the time there will be a high correlation between the riskiest stock and the highest possible return, which is consistent with the rules governing financial markets. I calculate that target for these stocks the same way I do for the names in the Profit Catalyst Alert portfolio. A price-to-earnings ratio is derived from the company’s earnings’ growth rate and then assigned to 2017 or 2018 estimates, based on when the company’s fiscal year ends.

Some of the names in the Sandbox may be added to the portfolio in the future but others may fall off if their business models do not evolve as I expect. Typically I am looking for either a decline in debt, an increase in earnings or a stumble in the stock price to give us a good entry point. I will not be issuing formal updates or alerts on these names but will include notes when significant news occurs. As always, feel free to post questions on the Profit Catalyst Alert site and I will answer as quickly as possible.

The Five Stocks

There are currently five stocks in the Sandbox. As I add or delete names from this list, I will summarize why in my accompanying analysis.

Gypsum Management & Supply (NYSE: GMS) is an initial public offering from June. Usually I like to wait a few quarters for a new issue before buying the stock so that I can get a good read on how reliable management is with its forecasts. Gypsum is a full-service distributor and installer of wallboard and ceilings. The stock is a direct play on the mini boom in housing. The company’s expertise in on-site delivery and installation creates an attractive barrier to entry. Gypsum made three large acquisitions in the past year. More work needs to be done analyzing how these purchases will influence earnings growth. Earnings are not high enough to justify buying the stock at its current price.

La-Z-Boy (NYSE: LZB) is known for its iconic recliners. While its customers nod off in its chairs, the company has been designing sleeker models to attract younger clientele and opening a slew of its own La-Z-Boy retail stores. Profits from these stores have been boosting earnings growth but not quite enough to compensate for the slower wholesale growth. We’ll be watching for either wholesale profits to improve or retail expansion to accelerate before moving on the stock.

We found Patrick Industries (NSDQ: PATK) while researching Profit Catalyst stock Drew Industries. Patrick also makes components for the RV industry, but Drew’s more specialized products bring in higher profits. To find more ways to play the resurgence in RV demand, we are analyzing whether Patrick’s recent acquisitions might push its estimates up enough to justify buying it.

We really wanted to love Ply Gem (NYSE: PGEM). This smallish ($1 billion market cap) supplier of stone, fencing, windows and siding has explosive growth. After barely turning a profit in 2014, earnings per share rocketed to 66 cents in 2015 and are expected to jump 90% in 2016. The bulk of the growth comes from acquisitions that pumped Ply Gem’s debt up to $900 million, and interest coverage is a mere 1.6 times. I am concerned that any speed bump in home building could send this company into the red, but the reward could be enormous given a target price that is more than double today’s share price. The high debt load earns this guy a 5 in risk rating. I’ll be watching to see if debt can be paid down or if earnings can grow enough to cover the interest more generously.

Sprouts Farmers Market (NSDQ: SFM) is doing all the right things. This chain of 231 organic grocery stores is increasing the amount of private-label products it offers (like Whole Foods’ 365 brand), improving sales of non-perishable goods that deliver higher profits, and expanding the prepared food sections of its stores. Valuation is our only issue with this stock. We’d look for lower prices any time the market swoons or if there’s a blip one quarter of disappointing results.