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 fewer 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

Identive Group (Nasdaq: INVE  )

*****

20

NA

Lear (NYSE: LEA  )

*****

64

13%

ProAssurance (NYSE: PRA  )

*****

89

(5%)

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.

When you're hot, you're hot
It's not going to have an effect on Identive Group's quarterly earnings report due out this week, but the million-unit order it received for near-field communication tags by an unnamed cell-phone manufacturer is going to look large in future quarters. Completing the order will take Identive six months.

Near-field communications, or NFC, is a technology that allows communication over very short distances -- typically just a few centimeters. Using a smartphone, a user can touch the phone to an NFC tag and immediately be connected to a website, dial a phone number, or launch an app to show information such as business details or points of interest.

Identive has already launched a demonstration project with Google (Nasdaq: GOOG  ) to enhance the search king's Place Pages service. The tech site The Register discounts Apple (Nasdaq: AAPL  ) as the buyer because 1 million NFC tags wouldn't be enough for the iPhone production line, though it does note the previously existing business relationship with Google, and it's been working with VeriFone (NYSE: PAY  ) to develop payment terminals from wireless handsets.

With analysts suggesting that NFC purchases could reach $670 billion by 2015, up from $240 billion this year, there's a near-term growth lever Identive can pull.

With less than two dozen CAPS members and just seven All-Stars weighing in so far -- but all saying it will outperform the market -- and still no professional analyst coverage, Identive Group is flying under the radar of most of Wall Street and Main Street. You can beat them to the punch by adding the NFC leader to the Fool's free portfolio tracker and sharing your opinion on the Identive Group CAPS page.

Under the hood
Will Honda Motor's loss be auto-parts supplier Lear's gain? The Japanese automaker reported that it expects sales to plummet 36% in July and August, partially a result of the still-lingering effects of the earthquake and tsunami earlier this year. Sales were off 21% in June. Honda is part-owner of one of Lear's major Japanese competitors, TS Tech, though its primary rival remains Johnson Controls.

According to the NADA, auto sales in the U.S. were up 13% year over year at the end of June, underscoring the 21% jump in revenues Johnson recorded last quarter, though profits were down (they still beat analyst expectations, however). Auto-parts supplier Magna International also recorded higher sales and was looking to increase production.

Lear counts General Motors, Ford (NYSE: F  ) , and BMW as its three biggest customers, so it's obviously going to be counting on them for its growth, and Ford thinks the industry can hit 13 million vehicle sales industrywide this year, but some analysts think the economy could stall growth.

CAPS member ipsiety sees industry trends combined with a discounted value for Lear as adding up to a good investment.

1b in net cash on balance sheet.

p/e=11

p/s=0.45

Pent up demand for auto parts.

Supply your opinion to the Lear CAPS page and add the stock to your watchlist.

This is no lemon
The financial position of medical-malpractice insurer ProAssurance continues to rise. Last quarter, expenses rose incrementally, but losses fell sharply, giving it a combined ratio of 79.2%, a significant improvement over the 88.4% it achieved in the prior quarter. An insurer's combined ratio measures the percentage of premiums an insurer has to pay out in claims and expenses, with lower numbers meaning it's earning more than it's paying out.

Ratings agency A.M. Best recently reaffirmed ProAssurance's "A" rating, which is considered excellent, but analysts still think that the industry's stiff price competition, loss cost trends, and challenges coming from regulatory changes make it a dicey bet.

The CAPS community doesn't seem to have the same reservations, as 96% of the members rating the insurer -- and all but one All-Star member -- think it will go on to beat the Street. You can add ProAssurance to the Fool's free portfolio tracker to see whether it can insure a positive outcome.

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 Apple, Google, and Ford. Motley Fool newsletter services have recommended buying shares of General Motors, Google, BMW, Apple, and Ford and creating a bull call spread position in Apple. 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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