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 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 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.

Cabot (NYSE: CBT  )

****

69

8%

First Commonwealth Financial (NYSE: FCF  )

****

93

31%

RadNet (Nasdaq: RDNT  )

****

44

2100%

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.

It's a whiteout
Specialty chemical maker Huntsman (NYSE: HUN  ) says price hikes are on the way because the base materials necessary to make bright white pigment is getting harder to secure and more expensive to buy. There's such huge demand for it that factories are in overdrive to produce it and that's leaving the possibility of a global shortage of titanium dioxide, one that could affect the auto industry.

Cabot is at the other end of the color spectrum in the specialty chemical industry, but its products are just as critical to carmakers. It makes carbon black products that are used by tire manufacturers like Goodyear (NYSE: GT  ) as rubber reinforcing agents, and Cabot is also reporting scorching demand, particularly overseas.

With 93% of the CAPS members rating the specialty rubber products maker to outperform the broad market averages, you can bet they're expecting it to peel out in the quarters ahead. Add Cabot to your watchlist then head over to the Cabot CAPS page and let us know if you agree its ready to burn rubber.

Under the radar
A number of banks use their reserves for loan losses as a slush fund to manage earnings, as reducing the amount put away boosts profits. First Commonwealth Financial reduced its loan loss provision, but its nonperforming assets ledger seems to actually be improving, thus justifying the reduction. Total non-performing loans dropped 21% in the fourth quarter from the year ago period while loans delinquent 90 days or more fell 13%. Even so, the bank did withdraw a lot of cash from those reserves, reducing the fund to $8 million in the current period from $21 million a year ago.

Although it got stuck with some real estate after a proposed sale of the property fell through, First Commonwealth is looking in much better financial shape. Net income jumped nearly fourfold to almost $12 million compared with just $2.7 million the year before. It's easy to see how moving money around can bolster results.

CAPS All-Stars remain wary however, with more than a quarter of those rating the financial institution believing it won't be able to beat the street. You can deposit your thoughts on the First Commonwealth Financial CAPS page and let us know if you see earnings massaging at work or an improving situation.

In hot pursuit
In the two years since RadNet appeared on a list of stocks looking like they were on their deathbed, the diagnostic imaging specialist has managed to hang on, even if the situation is still no more promising than it was back then. The stock is little changed but its Altman Z-score, an indicator of financial health and bankruptcy probability, is precariously low.

Maybe it's the industry, because short sellers have been targeting rival Alliance Health care Services (NYSE: AIQ  ) , though CAPS member SqueezePort says that makes it ripe for a squeeze, as more than half the company's float is sold short. But when larger, better financed companies like McKesson (NYSE: MCK  ) are targeting your business, it can be difficult to get a clear picture of the future.

RadNet operates a group of regional networks comprising 180 diagnostic imaging facilities located in seven states, and has been making a number of acquisitions lately to improve its operations. While CAPS members are very bullish, RadNet's growth-by-acquisition strategy is a difficult one for businesses to maneuver. Yet at 16 times earnings estimates and trading at a miniscule multiple compared to its sales, it could be offering a compelling valuation.

Tell us on the RadNet CAPS page whether you think it will be able to focus on generating the profits it needs to stay out of trouble.

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.

McKesson is a Motley Fool Inside Value selection and a Motley Fool Stock Advisor pick. Dynamic Materials is a Motley Fool Hidden Gems choice. Motley Fool Options has recommended a write covered strangle position on Seaspan. The Fool owns shares of Dynamic Materials, and Seaspan. 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.


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