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

Stock

CAPS Rating (out of 5)

No. of Active Picks

Est. EPS Growth Next Yr.

Empire District Electric (NYSE: EDE  ) **** 91 6%
NetSpend (Nasdaq: NTSP  ) ***** 25 18%
Pacira Pharmaceuticals (Nasdaq: PCRX  ) ***** 20 20%

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.

Good time Charlie
The pattern of severe weather that ripped through the country (and the globe, really) earlier this year has rocked business and industries central to those regions hardest hit. Insurance companies like Alleghany and Berkshire Hathaway (NYSE: BRK-B  ) even have felt the storms' wrath on their financial statements, yet believe it or not, there are still pockets of disaster that have yet to return to normalcy.

Empire District Electric is a utility based in Joplin, Mo., which was the heart of where a category F5 tornado tore through the region this past May killing 162 people and making it the deadliest tornado to hit the U.S. since 1947. The company recently reported that almost 4,000 residential, commercial, and industrial customers have yet to return to service as a result of the killer twister.

Restoration costs for Empire are expected to run as high as $30 million, and wiped out 10% to 15% of its customer's electricity usage. The utility suspended its dividend as a result, requested permission to defer expenses associated with the tornado, and may seek rate hikes to offset the lost revenue. It's already said the dividend is on schedule to be restored in the first quarter of 2012, suggesting that its financial health will come through intact, which helps explain why 94% of the CAPS All-Stars rating Empire think it will outperform the market indexes.

Let us know in the comments section below or on the Empire District Electric CAPS page if investors will get a charge out of this stock again and add it to your watchlist to be notified of the latest developments.

Down but not out
Using a debit card instead of a credit card to pay for merchandise can make a lot of sense since it doesn't bury you under a mountain of debt. You just have to pick the right one.

The prepaid debit card industry got something of a shiner when Kim Kardashian lent her famous-for-being-famous celebrity to a prepaid card that walloped consumers with a host of fees. Rapper Li'l Wayne seems to be on a similar course with one he just endorsed, but analysts look at his target market and see a high probability of success. The unbanked and underbanked urban community is a target-rich environment for marketers.

This suggests prepaid debit card issuer NetSpend will more than make up for three partners it recently lost after it added new, high-profile partnerships with BET, PayPal, 7-Eleven, and Blackhawk, a gift card distribution network owned by Safeway (NYSE: SWY  ) . NetSpend previously focused on the check cashing industry, but is broadening its reach into areas traditionally targeted by other prepaid card issuers, like Green Dot (Nasdaq: GDOT  ) and privately held UniRush.

CAPS member bc67 sees NetSpend filling a niche that until recently has been ignored by traditional banking institutions:

I am always amazed at the number of people that do not have checking accounts and therefore do not have a traditional debit card especially in the NYC area. NTSP fills this need and despite legal challenges to their business I am a buyer!!

Add NetSpend to your watchlist and let us know in the comments section below whether -- like the payday loan industry that attracted the ire of so-called consumer advocates because it targeted the underbanked -- it will similarly be singled out.

The path least taken
Though Pacira Pharmaceuticals is seeing its shares lose half of their value despite gaining FDA approval for its postsurgical painkiller Exparel, the CAPS community remains unanimous that the drugmaker will outperform the market averages. While still flying below the radar of Wall Street, as well as Main Street, Pacira could raise its profile if its plan to target hospitals instead of individual practitioners pans out. It's a risky strategy -- but one that has potential for making targeted sales. And with Novo Nordisk (NYSE: NVO  ) exploring ways to use Pacira's proprietary delivery system with other drugs, it's possible there could be lucrative deals down the road.

Add the drugmaker to the Fool's free portfolio tracker and tell us on the Pacira Pharmaceuticals CAPS page if you think it will overcome the high negatives the market is assigning it.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Alleghany and Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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