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 Rofin-Sinar Technologies to OYO Geospace. 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.

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
Spun off this past summer from oil and energy engineering giant McDermott (NYSE: MDR) as a means of avoiding a regulatory minefield for accepting government contracts, Babcock & Wilcox has seen its portion of revenues from government operations steadily climb. They now account for almost 39% of total revenues while power generation comprises the balance.

But look for power generation to be a game-changing segment. In conjunction with privately held Bechtel, B&W plans to deploy scalable nuclear reactors, a disruptive, new technology. Its modular system of light-water reactors -- a simpler, cheaper style that relies upon ordinary water to cool the system -- allows potential customers like First Energy (NYSE: FE) and the TVA to add modules to the system as customer demand expands.

Unlike traditional reactors, like those built on site by Shaw Group, B&W's modular units will be factory-built and delivered to the site ready to power up. If approved, this could upend the industry. But there's the key: If they're approved. The Energy Department certainly seems supportive of the concept, but until B&W is actually building and installing these systems, the developer is still going to be a traditional nuclear engineering firm.

Investors are stoked about that future potential, though, and CAPS members across the board are unanimous in their belief Babcock & Wilcox will melt the market's returns. I like the potential as well and have marked B&W to outperform. Head over to the Babcock & Wilcox CAPS page to let us know your own opinion about its future.

Good for what ails you
Much like its larger and better known peers Frontier Communications (NYSE: FTR) and CenturyLink, comparatively tiny Otelco delivers telecommunication services to rural areas, but is carving a niche for itself in an eclectic collection of states including Alabama, Maine, Massachussetts, Missouri, and West Virginia.

Where the market values CenturyLink at nearly $13 billion and Frontier at $9 billion, Otelco has a market cap of just $252 million. All three sport high dividend yields, and while some have questioned just how sustainable they are, chasing yield is always a dangerous pursuit.

All-Star CAPS members are solidly behind Otelco's success, however, and 82% of all those rating the telecom think it will outperform the broad market averages. Be sure to add it into the Fool's free portfolio tracker, then head over to the Otelco CAPS page and let us know if it has the right connections.

In hot pursuit
Symetra Financial is another relatively new member of the public markets, but one with a history dating back to the 1950s. It had been owned by Berkshire Hathaway (NYSE: BRK-A) and White Mountain Insurance before its IPO last January, and a series of earnings misses had CAPS member OrangeCrema thinking the market had mispriced the stock.

two earnings misses really knocked this one into bargain territory. At 50% tangible BV, and good profit margin, they earned about 180million last year. I expect that they will be back at their 2005 profit level by mid-2011, which was about 205million per year. This should put their price near $15/share by my estimates.

Since offering that insight last September, Symetra's stock has jumped 33% and the CAPS community remains overwhelmingly bullish. All-Stars are unanimous the insurer will continue its winning ways. You can add Symetra to your watchlist to keep on top of all the news and analysis about this insurer's potential.

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.