Hidden Stocks for High Returns

To paraphrase the song, investors are looking for stocks to love in all the wrong places. They'll pile into the momentum stocks everyone else buys, but they'll ignore lesser-known opportunities for fear of straying from the crowd. 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.

Stock

CAPS Rating (out of 5)

Number of Active Picks

Estimated EPS Growth Next Year

Banco Santander Brasil (Nasdaq: BSBR  )

****

92

21%

Carriage Services (NYSE: CSV  )

*****

86

13%

Kinder Morgan (NYSE: KMI  )

*****

50

14%

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 these companies before you plug them into your own portfolio.

When you're hot, you're hot
The Brazilian economy remains robust. Unlike BRIC counterpart China, which had to slam hard on the brakes when its economy overheated, such as when it clamped down on its housing bubble, Brazil has been able to continue steadily applying pressure to its economy as a means of cooling it off. Most recently, central bankers raised interest rates in hopes of dampening consumer demand by increasing borrowing costs. Analysts see this as a generally positive development for a steady-growth scenario.

It should be a net plus for interest-rate-sensitive industries, such as banks (including Banco Santander Brasil) and homebuilders (including Gafisa (NYSE: GFA  ) ). A modest offset is the tighter liquidity requirements being implemented concurrently as a way to curb consumer lending. Unemployment is falling in Brazil, leading some analysts to rate the country as the top global retail expansion market.

Shares of Santander have fallen 30% from their 52-week highs, as fear of inflation undercut the more positive aspects of the growing Brazilian economy, but that creates a good investment opportunity. Analysts at UBS, for example, dismiss the argument that banks face slower credit growth, asset-quality deterioration, and margin compression. CAPS member Prodders would agree: "Valuation looks very reasonable here, when you put it in the context of a hugely under-penetrated credit and in particular mortgage market in Brazil. Target $15 for a nice 40% return."

Add your own thoughts on its potential on the Banco Santander Brasil CAPS page.

Under the radar
It seems the death-care industry goes through a period of rollups every few years. Alderwoods Group had been burying the competition in its folds, until Alderwoods itself was bought out by Service Corp. International (NYSE: SCI  ) . Now Carriage Services seems to be doing something similar, buying up numerous independent operators in various strategic markets. It owns 151 funeral homes in 25 states and 33 cemeteries in 12 states.

As has often been the case with death-care operators, though -- and what initially got Alderwoods into trouble -- is the level of debt on the books. Carriage Services' debt load is more than double its market cap, which CAPS All-Star member alphadogg says it's what's probably weighing down the stock: "FCF analysis puts it very high, around 40, the debt is a concern, larger than the market cap, and that is probably what is holding it down. Probably not a $40 stock but could be a $20 stock if growth pans out...high risk high reward."

Alderwoods had loads of debt when Motley Fool Hidden Gems recommended it many years ago, but what analyst Tom Jacobs saw in the company then was a significantly discounted stock trading at just 6 times enterprise value-to-free cash flow. Carriage Services, however, goes for 21 times EV-FCF.

Let us know on the Carriage Services CAPS page whether this stock is dead and burie

In the pipeline
The heat wave that gripped much of the country this week should benefit natural-gas plays such as Chesapeake Energy (NYSE: CHK  ) and pipeline operator Kinder Morgan. Residences and businesses will be cranking up the air conditioning, and if the rest of the summer plays out the same way, nat-gas demand will be booming.

Prices had been rising steadily until a higher-than-expected inventory report gave traders a reason to sell. But after an extended time at record lows, the turnaround for the natural-gas industry seems at hand, and Kinder Morgan's recent IPO will prove to have been taken at a propitious time. Kinder Morgan Energy Partners (NYSE: KMP  )  produces virtually all of its total cash flows.

Kinder Morgan is still flying under the radar of most investors these days, but of the few dozen CAPS members who've rated the pipeline operator, 96% believe it will outperform the broad market averages. Add Kinder Morgan to the Fool's free portfolio tracker to keep an eye on whether it will transport its stock to a higher level.

Keep a high profile
We've had three stocks today that hold a lot of promise but possess equally persuasive arguments for swearing them off. That's why you need to look beyond the headlines and press releases to get a fuller picture of where your money is going.

You can also check into Motley Fool CAPS and tell us whether these low-profile stocks are on their way to higher returns.

Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Rich Duprey has no financial position in any of the stocks mentioned in the article. You can see his holdings. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1505996, ~/Articles/ArticleHandler.aspx, 11/25/2014 8:38:35 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement