Like the song says, investors are looking for stocks to love in all the wrong places. They'll pile into the momentum stocks everyone else buys, but ignore lesser-known opportunities for fear of straying from the crowd.
Yet the search for undiscovered jewels has informed many of our Motley Fool Hidden Gems picks, from Under Armour to Vail Resorts. Overlooked by Wall Street and Main Street, and thus undervalued, these stocks hold the best potential to deliver outsized returns.
The Motley Fool CAPS community knows a bargain when it sees one. Below, you'll find several under-the-radar stocks that brim with promise. These companies have garnered less than 100 active recommendations on CAPS, despite double-digit growth in earnings over the past three years.
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Stock
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CAPS Rating (out of 5)
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No. of Active Picks
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3-Year EPS Growth Rate
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Millipore (NYSE: MIL )
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**
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78
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19%
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Sharps Compliance (Nasdaq: SMED )
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***
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55
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101%
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Transcend Services (Nasdaq: TRCR )
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***
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84
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44%
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Source: Motley Fool CAPS.
Naturally, we want you to look a bit closer at these stocks before buying. Maybe investors are staying away from these stocks for a reason, so make sure there's nothing seriously wrong with the company before you plug it into your own portfolio.
Under the radar
Needing to bolster their pipelines and enhance their revenue streams, look for pharmaceutical companies to bid up and buy out smaller biotechs with novel treatments in development and service companies that can provide cash while drugs are in trial.
The latter is what's going on with Millipore, a supplier of life sciences lab equipment. In February Thermo Fisher Scientific (NYSE: TMO ) , the world's largest lab equipment manufacturer, made a $6 billion offer to acquire Millipore, a deal that analysts thought made a lot of sense considering how well the two complement each other. While some thought General Electric might also be interested, it was Germany's pharmaceutical and chemical giant Merck KgaA that came in and trumped Thermo Fisher with a $7.2 billion offer.
The value to Merck lays in a stable stream of revenues that can smooth over nasty surprises, such as when Erbitux, a lung cancer treatment, was rejected by European regulators last year.
Life sciences were already receiving greater attention from investors and more than 88% of CAPS members rating the equipment maker indicated they expected Millipore to outperform the market. Whether Thermo Fisher sweetens its bid or Merck consumes Millipore, it shows the value inherent in the field.
Stay sharp
When needles and other medical waste washed up on the shores of several New Jersey beach communities two years ago, it brought back painful memories of the "syringe tides" of the 1980's that cost the tourism industry an estimated $1 billion. How much easier would it have been for the Pennsylvania dentist responsible for the recent dumping to instead have used the services of Sharps Compliance, a disposal-by-mail service?
While its just-reported third-quarter earnings give the appearance of a faltering business, that's really because of last year's government contract that paid for Sharps' services upfront. It does faces tough competition from industry leader Stericycle (Nasdaq: SRCL ) , which also offers by-mail services, but the maintenance portion of Sharp's contract continues to grow, and it's continuously building out its services to pharmaceuticals, pharmacies, and health-care professionals.
CAPS member danpuperi sees Sharps Compliance as a winner from upcoming healthcare spending cycles:
A big slice of their revenue last year came from a contract with the US Govt in Feb 2009. As the Govt (EPA and legislatures) increase in regulation for hazardous waste, this market will continue to grow. If the company is getting government contracts, these are going to continue to increase as government healthcare spending increases. Looks like a solid growth story at a good value. Going to purchase with my real money portfolio.
Transcendental meditations
Completing the health-care triumvirate this week is Transcend Services, which was also involved in a bidding war to acquire a bankrupt rival. The medical transcription services firm had offered to buy Spheris for $78.3 million, initially outbidding MedQuist (Nasdaq: MEDQ ) , but that company came back with a much higher cash offer of $98.8 million.
Even though the pursuit hurt Transcend's earnings this quarter, profits still rose 3% on a 49% increase in revenues, and management says they'll remain on the prowl for potential targets. Highly rated CAPS All-Star Popnfresh100 saw Transcend coming out on top in the auction for Spheris, but he still sees huge growth potential in Transcend's coin-drop business model:
Medical transcription companies are paid by the line, right? New healthcare plan=more healthcare data=more lines of transcription. That's the world's easiest form of growth.
Transcend is No. 2 in the industry by market size, but they have better margins than MedQ and have been picking up market share. My money would be on Transcend for the Spheris acquisition, and for continued market growth.
Transcribe your thoughts on the Transcend Services CAPS page on whether it will write its own growth story.
Keep a high profile
Sign up today for the completely free Motley Fool CAPS service, and tell us whether these low profile stocks are on their way to higher returns. There you can read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page.
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