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 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 less active recommendations on CAPS, though the community thinks they still have outsized potential.

Stock

CAPS Rating (out of 5)

No. of Active Picks

Estimated EPS Growth Next Year

Education Realty Trust (NYSE: EDR  )

****

84

12%

Infinity Property & Casualty (Nasdaq: IPCC  )

*****

42

7%

US Lime & Minerals (Nasdaq: USLM  )

*****

100

(31%)

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

Putting a roof over your head
While residential housing is a mess, student housing remains as strong as ever. Sending kids off to college often entails finding a place for them to live, but there's a shortage of housing targeted toward them, and occupancy rates in dorms are healthy. It points to boom times for companies that specialize in providing student housing.

Industry leader American Campus Communities (NYSE: ACC  ) , with 104 properties, had 98% occupancy rates across its campuses as of the end of last year. Campus Crest Communities, which operates just 27 properties, and Education Realty Trust, which manages 56 communities, have occupancy rates north of 88%.

The investment strategy seems to coincide well with interest in multifamily housing. Because people aren't buying houses but still need a place to live, it means they'll be turning to apartments as the next best thing. The analysts at Credit Suisse say the "off-campus student housing market has seen a significant increase in demand from enrollment growth at public universities," while those institutions find they have little money or expertise in managing such housing.

It's not a risk-free investment, as CAPS member hugh89 notes.

Heavy debt. However, before it went freefall in 2008, average for this stock was $11-13 range . Believe they have potential to regain their former range, as college ranks swell once more due to economic recovery, allowing anyone who buys in now to double their money.

Add your own thoughts on its potential at the Education Realty Trust CAPS page and see whether it can make it to the head of the class.

Under the radar gun
It seems that nonstandard lines of insurance in niche industries that are attracting the most investor attention these days. AmTrust Financial Services (Nasdaq: AFSI  ) covers specialty lines such as legal expenses in the event of unsuccessful litigation, while Hallmark Financial Services (Nasdaq: HALL  ) covers higher-risk individuals and businesses, such as health-care professionals who can't get coverage elsewhere because of higher loss histories.

Infinity Property & Casualty applies the same thinking to the auto-insurance market, where it covers drivers who, because of their driving record, age, or vehicle type, offer a higher than normal risk profile. Revenue growth has been hit over longer periods of time, but trailing 12-month revenues surged 12% last quarter, and it seems like it's on the road to recovery.

While 88% of the CAPS members rating Infinity Property & Casualty believe it can outperform the broad market averages, the dozen All-Stars weighing in are unanimous in their opinion it can. Ensure that your voice is heard on the Infinity Property & Casualty CAPS page, and protect yourself by adding the stock to your watchlist.

This is no lemon
It's not one of the first products that pop to mind when discussing the construction industry, but limestone remains a key component, and along with Martin Marietta (NYSE: MLM  ) , U.S. Lime & Minerals is a leading producer. In fact, as a result of industry consolidation, the top three producers account for more than two-thirds of North American lime-production capacity.

Companies tend to be regional, concentrated around known lime deposits. U.S. Lime is headquartered in Texas, but with operations throughout the southern and central states, it has product sales that extend to the East Coast. It has a small natural gas business, too.

The lime producer is flying beneath Wall Street's radar now, but the CAPS community has caught on to its potential, and 91% of the All-Stars rating it see it turning in market-beating results. The risk, of course, is that its two largest segments -- construction and steel production -- have been affected by the recession. It might be a sleeper business until those industries turn around.

You can add the U.S. Lime to the Fool's free portfolio tracker to see whether it can construct a new growth profile or will turn into a lemon.

Keep a high profile
We've had three stocks today that hold a lot of promise, that investors want to get behind, and that possess 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.

The Motley Fool owns shares of AmTrust Financial Services. 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.


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