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 spurred many of our Motley Fool Hidden Gems picks, from Dynamic Materials to Seaspan. 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 fewer active recommendations on CAPS, though the community thinks they still have outsized potential.

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; make sure there's nothing seriously wrong with the company before you plug it into your own portfolio.

Under the radar
Late last year, Singapore Exchange purchased ASX, the Australian stock exchange operator. Now the London Stock Exchange is buying the Toronto Stock Exchange, and Deutsche Boerse is willing to throw $10 billion at NYSE Euronext (NYSE: NYX). Investors are rightly wondering who's next. Will Nasdaq OMX Group (Nasdaq: NDAQ) or CBOE Holdings, the operator of the Chicago options exchange market, be the next market to be bought out? Will Nasdaq buy CBOE?

Even without the buyout rumor-mongering swirling about, investors were pretty stoked about CBOE's future. Wall Street, All-Star CAPS members, and the general CAPS community were all unanimous in their opinion that the options exchange would return higher values for shareholders.

You can make a bid for the exchange yourself by adding it to your watchlist and having all the Foolish news and analysis about the stock aggregated for you in one place.

Good for what ails you
China Hydroelectric is flying so far under the radar it might actually be a submarine. While 25 CAPS members have weighed in on the Chinese power producer (only one thinks it won't outperform the broader market averages), no one's yet made a pitch for or against the company. Wall Street, though, is unanimously backing its prospects.

One analyst recently wrote in Forbes that China Hydroelectric offers better returns on electricity produced than anywhere else in the world. While he suggests that makes it a good buy, considering the welter of accounting shenanigans small-cap Chinese stocks have produced these days, it actually gives me pause.

He says unleveraged equity in the company runs around 13% compared with at most 8% at most elsewhere, with construction costs, capacity utilization, and operating costs all far outstripping what anyone else is able to achieve. Agreed, labor is very cheap in China, but Yangtze Power, the largest hydroelectric producer in the country and the operator of the Three Gorges Dam, is facing a 30% drop in year-on-year profits, according to Goldman Sachs, unless it can get a tariff hike.

However, it seems a bit harder to pull the wool over someone's eyes about a hydroelectric power plant than about other lines of business, and its auditor is Ernst & Young HuaMing. So be sure to add China Hydroelectric to the Fool's free portfolio tracker, then power up your opinion on the China Hydroelectric CAPS page.

In hot pursuit
Last year, ZIOPHARM Oncology's stock took a hit when the biotech said it would conduct trials on palifosamide without receiving a special protocol assessment from the FDA. It's been mounting a comeback ever since the agency granted its peripheral T-cell lymphoma drug orphan-drug status, which would allow it to compete against Allos Therapeutics (Nasdaq: ALTH) when it comes to market. Allos currently has the only drug approved for PTCL.

ZIOPHARM's also hooked up with synthetic biology company Intrexon, whose principal is building up a large stake in the company as a means of using its own delivery platform in conjunction with the drug. However, CAPS member AGCAPS1 thinks Intrexon will be the only investor to profit from any success ZIOPHARM achieves:

First review the released statements since 2009. Then read about what this company does. They research on eliminations of the existent cancer drugs side effects. This company works in drugs researching provided by Intrexon. If they become successful "many years away", most likely the Intrexon will be the one profit from it. The stock is overpriced.

Tell us on the ZIOPHARM Oncology CAPS page whether you think it will be able to dial up the profits it needs to stay out of the penny stock wastelands.

Keep a high profile
So there are three stocks that hold a lot of promise today, and investors want to get behind them -- but there are equally persuasive arguments for swearing them off. That'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.