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. 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.

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
Cleveland BioLabs will be meeting with the FDA and the Biomedical Advanced Research and Development Authority (BARDA) soon to discuss the additional information the agencies requested from it at the end of May for its radiation drug Protectan. The delay was bad news, as the company relies wholly on the government for its revenue, and Cleveland BioLabs ended up directly selling almost 6 million shares at $4 a share to institutional investors in an effort to net some $22 million.

While that will get it by for the time being, of greater concern is its missing the Sept. 30 deadline for new funding. Management believes there's sufficient support for the type of program it's developing, so it will be able to secure funding if the FDA and BARDA eventually agree, but that, and the fact it will have to compete against AstraZeneca's (NYSE: AZN) Ethyol in the medical radiation-protection market, has driven Cleveland's shares down 70% from the highs reached earlier this year.

All but one of the CAPS All-Stars who weighed in think it ought to outperform the indexes, and its four-star rating shows that the investor community believes it has at least a better than fighting chance of success. Add Cleveland BioLabs to your watchlist for complete coverage of its developments.

An expensive proposition
Rare diseases make for expensive treatments, but also for risky investments. Just ask KV Pharmaceuticals and Dendreon (Nasdaq: DNDN), both of which saw shares crater after the tab for their medicines proved too much for patients and doctors to foot. On the other hand, knowing, as Bristol-Myers Squibb (NYSE: BMY) does, that insurers will pay for or reimburse at least the out-of-pocket expenses required to pay for its Yervoy treatment, which runs for $120,000, means there's a lot greater acceptance.

So some analysts don't think the $350,000 estimated annual cost for Raptor Pharmaceutical's cystinosis treatment drug candidate DR Cystamine will prove a hindrance. Only about 500 people in the U.S. have cystinosis, a genetic condition that's both rare and fatal and is caused by the accumulation of amino acids in cells. One research shop suggests as many as 75% of that population will take the drug, which could generate more than $130 million in revenue.

The stock is flying under the radar of most of Wall Street and Main Street. On CAPS, 28 of the 29 CAPS members who have weighed in think Raptor will outperform the broad market indexes.

Let us know what you think on the Raptor Pharmaceutical CAPS page.

Through a cracked lens
Maybe spending your way through a financial crisis works better for companies than it does for governments. Oil and gas operator SandRidge Energy (NYSE: SD) is determined to find out. It's basically raising its capital spending program to $1.8 billion this year, and spending a like amount next year, despite carrying a large debt load.

SandRidge will pay for the programs with money earned from selling off assets, cash on hand, and the money it received from spinning off SandRidge Permian Trust and SandRidge Mississippian Trust I.

SandRidge Permian owns royalty interests in 509 developed oil and natural gas wells and 888 oil and natural gas development wells to be drilled in Texas. Highly rated CAPS All-Star TSIF sees that as a good prescription for a long-term solid investment:

Trusts have various variations on how they are implemented. Some are for a certain time period, some disappear as the resource is used up. SandRidge Permian plans on splitting profits between shareholders and continued drilling that should carry it through more than a decade at potentially increasing production and has considerable more time before worrying about asset depletion

Add SandRidge Permian Trust to the Fool's free portfolio tracker and see if it will earn your trust as an investment.

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.