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 Guess? to Infinera. 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 5 Years

Cloud Peak Energy (NYSE: CLD  )

*****

93

8%

Fortinet (Nasdaq: FTNT  )

****

53

19%

LyondellBasell Industries (NYSE: LYB  )

*****

38

NA

Source: 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
While Arch Coal and Peabody Energy garner more notice from investors and Massey Energy (NYSE: MEE  ) dominates the headlines by saying it wants to sell itself to the highest bidder, one of the country's largest coal miners Cloud Peak Energy goes about its business in relative obscurity.

Cloud Peak operates four mines in Wyoming and Montana, three of which it owns outright with the fourth having a 50% split interest. Christopher Barker, one of the Fool's top resources gurus, pointed out last year the opportunity Cloud Peak's shares held because of the low valuation the market was assigning them.

When looking at Arch Coal's purchase price of Rio Tinto's (NYSE: RIO  ) Jacob Ranch mine, Cloud Peak's own mines in the same Powder River Basin area made it attractive. With the consolidation under way in the industry, Cloud Peak is looking all that more attractive today, even after its shares have taken a walk in the clouds and climbed 55% over the past year.

CAPS All-Stars are unanimous in their view that Cloud Peak will continue to mine greater returns for investors, no doubt agreeing with MarkGillCPA that being the low-cost leader will serve it well.

Cloud Peak Energy (CLD) operates 3 coal surface mines in the Powder River Basin of Wyoming. It is a 2009 spin-off from Rio Tinto. [Cloud's] 3 coal mines are some of the lowest cost mines in the industry. In Q3 [Cloud] produced coal at $8.50 per ton, grossing $4 per ton. [Cloud] is trading at 10.7x 2010 EPS and 9.6x 2011 estimated EPS. It has a FCF Yield of over 30% and an ROIC of 17%. Target = $31.

Rev those engines
Specialty chemical maker Huntsman (NYSE: HUN  ) thought it had locked in a sure-fire sale of itself to Hexion Chemical, only to see the deal fall apart as the private equity backers ran away saying they would end up bankrupt if the deal when through. When LyondellBasel did file for bankruptcy protection around the same time, it seemed to underscore what Hexion was saying, and Huntsman subsequently let specialty chemicals maker off the hook with a $1 billion payoff, figuring that was a safer bet than going to trial.

Lyondell emerged from court protection earlier this year and is already planning to pay off $775 million worth of debt by the end of the year. The chemicals industry has improved substantially since then, with Dow Chemical up 34% over the past six months, Huntsman up 85%, and LyondellBasel itself 88% higher.

CAPS member bdaltoncain is particularly impressed with Lyondell's position in the current cycle for chemicals, a cycle that has potential to lift all boats.

Advantaged feedstocks and an abundance of wet gas make ethylene-based chemical companies a strong play for the next five years before fuel switching occurs and supply constraints occur

Head over to the LyondelBasel CAPS page and let us know if you think this company will be able to pull additional growth out of a hat.

End of times
Network security is only being seen as a ever more important necessity these days and a spate of acquisitions in the space, from Intel's purchase of McAfee to SonicWALL going private, only underscores the interest here. Fortinet and Sourcefire are some of the latest takeover rumor targets, with Blue Coat Systems (Nasdaq: BCSI  ) thrown in to the mix for good measure.

Virtually all of the CAPS All-Stars weighing in on the relatively unknown Fortinet believe with or without an acquisition, the network security specialist will be able to protect its profits and turn in market-beating performances. But only you can decide whether it deserve a spot in your portfolio, so add Fortinet to the Fool's free portfolio tracker to keep on top of all the news and analysis about this security leader.

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 more full 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.

Intel is a Motley Fool Inside Value recommendation. Infinera is a Motley Fool Rule Breakers choice. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended writing covered calls on Guess?. Motley Fool Options has recommended writing puts on Infinera. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of Guess? and Infinera. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in the article. You can see his holdings here. The Motley Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (5)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 15, 2010, at 11:54 AM, langco1 wrote:

    massey still has not settled its lawsuit over the april mine explosion that killed 29 miners.this settlement will be in the area of a billion! dollars thats close to 25% of the companys value!until this is over massey stock is going no where....

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