Hidden Stocks for High Returns

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 Blackboard to TransDigm. 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 100 or less active recommendations on CAPS, though the community thinks they still have outsized potential.

Stock

CAPS Rating (out of 5)

No. of Active Picks

Est. EPS Growth Next Yr.

AllianceBernstein Income Fund (NYSE: ACG  )

*****

58

NA

Sino Clean Energy (Nasdaq: SCEI  )

*****

19

NA

TrustCo Bank Co NY (Nasdaq: TRST  )

****

88

17%

Sources: Yahoo! Finance, Motley Fool CAPS. NA = not available.

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
With bonds yielding next to nothing, investors are craving dividends. Yields rule the field as everyone looks to achieve quick, high returns. For closed-end fund AllianceBernstein, it's also looking for current income, but it wants to achieve it with more than just a modicum of safety. That's why, although it invests as much as 80% of its portfolio in income-producing securities, typically two-thirds or more of its assets are invested in government-backed securities. It then tries to juice returns a bit by investing upwards of a third or so of its portfolio in "below-investment grade" securities.

Not surprisingly, over the past five years the China Fund (NYSE: CHN  ) has been the top performing closed-end fund, returning more than 27%, but the AB Income Fund has returned just over 8.5%. That's not too bad considering the market has been essentially flat over the same period.

A year ago, CAPS member MoneyDocSchloss called the AllianceBernstein Income Fund a must-have stock because of its solid financial reputation. The predictability of its outcomes (and its near 6% yield) is undoubtedly why this low-flying, closed-end mutual fund has 88% of those CAPS members rating it believing it will outperform the broad market averages.

Only you can know whether this type of investment is suited for your portfolio, but you can add it to your My Watchlist page and have all the Foolish news and analysis about it aggregated for you in one place.

Rev those engines
For a stock with a name like Sino Clean Energy, it sure operates a dirty sounding business. This Chinese small-cap company produces and distributes coal-water slurry fuel, a sludge of fine coal particles that are suspended in water. Despite the image, CWSF actually reduces harmful emissions into the air when ignited compared with traditional coal-fired plants, while also reducing the potential for explosions.

According to the market researchers at Frost & Sullivan, CWSF emits 80% less sulfur dioxide and 49% less soot than coal to generate the same amount of energy. The Chinese government has endorsed CWSF as a core energy technology, and the analysts see it achieving sustainable growth over the next five years. As one of the only publicly traded producers of CWSF, Sino Clean Energy has a unique position to grab a large share of the market.

The technology doesn't seem to have as much enthusiasm here as it does in China, though TECO Energy (NYSE: TE  ) has a demonstration project near Tampa.

No one's written a pitch yet for Sino Clean Energy, but the feeling is unanimous that it will beat the market. Even the 15 All-Star CAPS members rating the clean coal producer see it turning in a market-beating performance. Be the first to tell us on the Sino Clean Energy CAPS page why you also think it will be a winner -- or why it's bound to get dirtied up.

End of times
Bank of America
(NYSE: BAC  ) is getting crushed, as the extent of its exposure to the mortgage meltdown becomes more widely known. Citigroup (NYSE: C  ) , while well above the penny stock status it briefly held last year, still trades for less than $5 a share. There's a backlash being unleashed against these mega financial institutions, even as financial stocks generally are rising. It's for that reason that CAPS member mballiet says investors may want to look at regional banks like TrustCo Bank Co. NY:

Price/Book = 1.65%. Stock hasn't bounce up too much from 2009 low. TrustCo has paid a dividend for 20 years. Republican's historically support Main St. banks. Big bank backlash could benefit regional banks. This one is a safe gamble.

Tell us in the comments section below whether you think TrustCo will continue to generate interest from the market and add your thoughts on the TrustCo CAPS page too.

Keep a high profile
We've had three stocks today that hold a lot of promise that investors want to get behind, but possess equally persuasive arguments for swearing them off. It's why you need to look beneath the headlines and press releases to get a fuller picture of where your money is going.

Also check into Motley Fool CAPS and tell us whether these low profile stocks are on their way to higher returns.

Blackboard is a Motley Fool Stock Advisor pick. Blackboard and TransDigm Group are Motley Fool Hidden Gems picks. Try any of our Foolish newsletter services free for 30 days

Fool contributor Rich Duprey currently does not own any stocks as you can see here. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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