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 Dawson Geophysical to Sotheby's. 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.

Blinded by the light
Last December, the Food and Drug Administration gave Alimera Sciences a poke in the eye by issuing a complete response letter for its diabetic macular edema treatment Iluvien. Although they didn't outright reject the therapy, they wanted more data on its efficacy from patients receiving longer term care as well as on its third-party partner manufacturing processes. Not only did Alimera get blindsided, but its partner pSivida (Nasdaq: PSDV) did, too.

The three-year results for Iluvien from two late-stage studies were reported last month, and it showed the therapy was better than the standard care by a statistically significant amount. Alimera plans on filing its response to the FDA during the second quarter and points out the review period could be upward of six months away. In the meantime, investors will have to bide their time and wonder whether the growth of cataracts in patients will derail approval. Some 80% of patients who had not undergone cataract surgery prior to entering the trial ultimately went under the knife by the end of the 36-month trial period.

CAPS member TigersBlood thinks the overall effectiveness of Iluvien will win out, and highly rated CAPS All-Star zzlangerhans thought the FDA's rejection was a "soft" one, but the story is still one that has time to play out. It remains one of his top picks on CAPS.

See if you can see your way clearly to the Alimera Sciences CAPS page and let us know if this stock still has stars in its eyes.

Under the radar
Although the nuclear crisis in Japan has lifted shares for companies across the alternative energy space, the solar industry -- which was only just recently being rocked by dramatic cutbacks in tariffs across the globe -- has seen its prospects suddenly brighten better than most. But there remain clouds on the horizon.

The industry is once again in the midst of a polysilicon supply crunch and suppliers like MEMC Electronic Materials are speeding up capacity expansion plans to take advantage of the higher prices. It was the same thing a few years ago, but instead of seeing solar luminaries like Trina Solar (NYSE: TSL) or ReneSola (NYSE: SOL) capitalizing on it, polysilicon manufacturer DAQO New Energy might be the one that's going to get hot.

It reported surprising robust earnings earlier this month, reflecting the demand in place across the industry, while guidance for the coming quarter was also above estimates. CAPS member bgfrsh thinks this relatively new IPO will burn brightest.

Significant levels of cash and retained earnings allow for future growth. Triple digit growth in revenue and net income YOY. Strong operating cash flows despite upcoming capex to reduce bottlenecks. Poly prices have risen dramatically over the past few months and the company is vertically integrating into wafers and modules.

Light up the DAQO New Energy CAPS page by leaving your thoughts on whether it can maintain the margins it's been enjoying.

In hot pursuit
Community banking specialist Towne Bank has been stealthily growing by focusing its attention on its Hampton Roads, Va., backyard. Considering the high negatives Citibank or Bank of America (NYSE: BAC) sport with customers and investors because of their role in the country's financial meltdown, small-town banking as practiced by Towne resonates well.

Full-year revenue rose 13% in 2010 to a record $30 million while profits jumped 25%. It has made timely acquisitions that have added depositors and bolstered its property and casualty business, too. It also has an enviable string of consecutive quarters of dividends paid. CAPS member checkers9596 also appreciates Towne's capable management team.

The president (ceo) of this bank has a proven history. His last venture was locally Commerce Bank which was eventually bought by BB&T. This guy has worked the bank from the ground up. He is our local banking "Buffett". He is not in it to fail.

Although there's strong bullish sentiment on CAPS that Towne can beat the indexes, you can watch how the investment plays out by adding the community bank to the Fool's free portfolio tracker.

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.