To paraphrase a famous song, 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 earnings growth 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-Yr. EPS Growth Rate
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BofI Holding (Nasdaq: BOFI )
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***
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30
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66%
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Companhia Brasileira de Distribuicao (NYSE: CBD )
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****
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99
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82%
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Diamond Foods (Nasdaq: DMND )
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**
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96
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37%
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Source: Motley Fool CAPS.
Naturally, we want you to look a bit closer at these stocks before buying. Investors might be avoiding these stocks for a reason. Make sure there's nothing seriously wrong with the company before you plug it into your own portfolio.
Under the radar
Considering the state of the financial industry, Internet banking specialist BofI Holding has successfully navigated the narrow path of pursuing bank deposits and investing in real estate mortgages. Deposits climbed 40% in its fiscal fourth quarter, to $970 million, while total assets rose more than 12%. The company achieved this strong growth by keeping total non-performing assets below 1%, which led BofI to beat analyst earnings expectations by $0.31 a share.
However, the whole idea of investments in mortgage-backed securities has me worried. For the past few years, massive government intervention has propped up the real estate market -- and a number of those supports are now removed. The Fed stopped purchasing MBSes itself, and the first-time homebuyers tax credit expired. BofI's results also benefited from better comparisons to last year, which included the period in which Fannie Mae (NYSE: FNM ) was taken over by the government, and BofI lost $4.7 million on the sale of the agency's preferred stock.
If housing topples again without government support, such mortgage-backed securities may once more become a tough investment. Yet earlier this year, highly rated CAPS All-Star stocki711 noted BofI's ability to keep its financials intact, despite the rough going in the market:
They have a ratio of non-accuring loans (30 days delinquent or later) of 0.94. This ratio has been consistently below 1 throughout the crisis. They have tier 1 capital ratios greater than the "adequately capitalized" rate of 6%. Their deposit growth rate is increasing substantially at a rate of 12%
I would put my price target at $19 which is a 50% appreciation with growth still reasonably priced.
Stay sharp
Brazilian grocery store chain Companhia Brasileira de Distribuicao is likely to benefit from the country's accelerating growth. Latin America's largest economy is expected to grow more than 6% this year, causing a bit of consternation amongst government financiers who fret that the market will overheat. The health and expansion of this emerging economy has retail giant Wal-Mart (NYSE: WMT ) excited about the possibilities in Brazil, where it has more than 400 stores.
While that gives the U.S. discounter some heft, CBD is one of the largest retailers in Brazil in terms of revenue and number of stores. With its purchase last year of electronics retailer Globex, and its more recent attempted takeover of Casas Bahia, CBD is not to be taken lightly.
Almost 92% of the CAPS members rating the Brazilian retail giant believe that it will outperform the market. Analysts are revising their earnings outlook on CBD, too, raising estimates just in the past month. Head to the Companhia Brasileira de Distribuicao CAPS page and shop your own opinion of its prospects.
That's just nutty
If you know Diamond Foods at all, it's likely because the company is nuts: shelled, mixed, roasted, and trail mix, to be precise. But in 2005, Diamond transformed from a nut cooperative into the food and snack products company it is today. In addition to all forms of squirrel food, it now sells Pop Secret popcorn, which it acquired from General Mills (NYSE: GIS ) in 2008, and potato chips, following its recent purchase of Kettle Foods. The transformation has created 25% annual earnings growth over the last five years, even though industry heavyweight Kraft (NYSE: KFT ) produces the popular rival Planters brand.
CAPS member retireewannabee likes Diamond Foods' ability to demarcate its strategy for growth and follow through on it. Meanwhile, alfred13 came to the company through personal experience with their products:
My wife really liked several of the company's products. I took and look and liked where this company seems to be going. Good products and company growth.
Go nuts on the Diamond Nuts CAPS page, and tell us whether this company's worth squirreling away in your portfolio.
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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