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.

Stock

CAPS Rating (out of 5)

No. of Active Picks

Est. EPS Growth Next Year

Atlantic Power (NYSE: AT  ) **** 57 (146%)
Farmer Brothers (Nasdaq: FARM  ) ***** 40 386%
Marathon Petroleum (NYSE: MPC  ) ***** 60 (30%)

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.

Lack of energy
In a period of nearly interest-free money, the fact that independent power producer Atlantic Power issued new debt at rates of 9% seems like a bad sign. Using the funds to complete its acquisition of Capital Power Income, a power generation company with facilities in Canada and the U.S. that had a total net generating capacity of 1,400 megawatts, Atlantic was looking to double its power generating capacity, of which some 95% will come from clean energy sources. Its net generating capacity will rise 143% to about 2,116 megawatts, so perhaps the high price will be worth it.

Prior to the acquisition, Atlantic owned eight natural gas plants, two biomass facilities, and one each hydroelectric and coal plant. It also owns an 84-mile long transmission line in California. Some analysts have expressed concern that operators like Atlantic, DPL, and Dynegy (NYSE: DYN  ) with more exposure to fossil fuels remain less attractive investments. With a dividend yielding north of 8%, almost double what DPL's dividend yields, Atlantic is compensating investors for the risk.

With shares of Atlantic trading nearly 20% below their 52-week high, CAPS member okiedivot thinks the bad news from earnings, acquisitions, and the hunt for a new CFO has been priced in. Let us know in the comments section below or on the Atlantic Power CAPS page if it has the power to change course and add it to your watchlist to be notified of the latest developments.

Down but not out
Coffee prices have eased up across the board. From arabica to robusta, composite prices have fallen by about 15% to 20% from the highs they hit earlier this year. That's good news for coffee purveyors everywhere, who have been burned as commodity costs ate at profits. J.M. Smucker saw second-quarter earnings fall 15% despite higher sales because of higher coffee prices, while Starbucks (Nasdaq: SBUX  ) has begun raising prices on its cups of joe.

Farmer Brothers might not be the same household name as either of them, but it's been affected the same nonetheless, and now it's looking to capitalize on the new norm. Farmer Brothers has been around for 100 years and distributes coffee to institutional food-service establishments such as restaurants, hotels, casinos, and hospitals, as well as convenience stores, coffee houses, and grocery stores. Sales rose 11% last quarter, and it narrowed losses considerably, beating analyst expectations by a wide margin.

With more than a quarter of CAPS members rating the coffee service specialist to underperform the market, they might want to see some profits first before taking a sip of its stock. Add Farmer Brothers to your watchlist and let us know in the comments section below whether it can give you a good jolt.

The path least taken
Refiners have been profiting from the spread in oil prices between West Texas intermediate and Brent crude. Because of a lack of infrastructure in Cushing, Okla., a bottleneck developed there at storage depots, leading to an oversupply that was depressing oil prices and boosting refiner profits.

Oil refiners such as Tesoro (NYSE: TSO  ) , Valero Energy (NYSE: VLO  ) , and Marathon Petroleum were momentarily shaken when Enbridge announced it would buy a 50% stake in the Seaway pipeline owned by ConocoPhillips and reverse the flow from Cushing to the Gulf Coast, thus helping to alleviate the restrictions.

But that's all water under the bridge -- or oil through the pipeline -- now, as Marathon once again forecasts the spread between sweet and sour crude spreading, primarily because of widening demand. With a capital project budget of $1.2 billion, mostly on smaller refinery projects, Marathon is hoping to expand capacity by 50,000 barrels a day beginning next year and increasing its capacity to about 1.2 million barrels per calendar day by year's end.

Late last month, CAPS member callumturcan said that considering its recent performance, Marathon is a cheap stock.

PE ratio of 4.36 compared to industry average of 21.93. The stock is down 15% since July compared to a 3% drop in the SP-500. Also, its Q3 result were amazing, at $3.16 EPS compared to an expected $2.58. This stock is undervalued and should rise in the coming months.

Add the refiner to the Fool's free portfolio tracker and tell us on the Marathon Petroleum CAPS page if you think it will appreciate to higher levels.

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 Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks. 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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