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. Here 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. NM = not meaningful because of negative earnings.

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 a company before you plug it into your own portfolio.

Lack of energy
Investors love electric utilities because they're stable, profitable, dividend-paying businesses. Or at least they're supposed to be. Following the merger of Mirant and RRI Energy, the resulting new company, GenOn Energy, became one of the largest independent power producers in the country, but the utility has been anything but stable for its shareholders. The stock has lost more than a third of its value this year and last month reduced its guidance for the full year (and next year), bringing into question how the story is going to play out.

The utilities industry is undergoing a wave of consolidation as many players have experienced reduced profit expectations. Exelon is buying Constellation Energy (NYSE: CEG), and Duke Energy is paying almost $14 billion for Progress Energy (NYSE: PGN).

Starting next year, GenOn believes it will be on the path to generate costs savings of $160 million from the combined company, but analysts have long held an opposing view, believing it was a position of weakness on both parts that created the new company.

That hasn't stopped the CAPS community from fully endorsing the utility's prospects. All of the CAPS All-Stars rating it believe it will outperform the market indexes, and only one member from the broader community sees continued underperformance in its future. Let us know in the comments section below or on the GenOn Energy CAPS page whether you think it has the power to change course, and add it to your watchlist to be notified of the latest developments.

Down but not out
Investing in oil and gas storage and transmission facilities is the picks-and-shovels investment equivalent of the 1849 gold rush. Despite the best efforts of the alternative-energy crowd, we're not weaning ourselves off fossil fuels anytime soon, and we're going to be stuck with high energy costs for some time. That's going to attract more oil and gas production, which is going to need a means of getting it from where it's drilled to where it will be stored.

That sounds like it should a winning situation for Niska Gas Storage Partners, which claims the status of the largest independent owner and operator of natural gas storage assets in North America. But despite adding another 2 billion cubic feet of storage to its capacity so far this year, the glut of natural gas on the market has weakened prices to such an extent that quarterly profits last month fell 12%. Overproduction of gas has hit winter gas prices hard.

But it hasn't hit all operators equally. While Niska shares have been cut in half over the past 12 months, Buckeye Partners (NYSE: BPL) trades slightly above what it did a year ago. It may be time for a reversal of fortunes for Niska to explain the unanimous CAPS All-Star support it has generated.

Add Niska Gas Storage Partners to your watchlist, and let us know in the comments section below whether you think the glut of gas will continue to hamper its operations.

Going to town(e)
Unlike Mid-Atlantic regional banking peer BB&T (NYSE: BBT), which has branches across a dozen states, community banking specialist Towne Bank has been stealthily growing by focusing its attention on its Hampton Roads, Va., backyard. That may have contributed to the financial troubles it endured because of the localized outlook, but it may at last be on the road to recovery.

Towne finally paid off its TARP loan last quarter and reported record earnings as provisions for loan losses for the year steadily declined. While non-performing assets increased to 2.21% as a percentage of total assets compared with the year ago period, they were down for the second consecutive quarter, showing that it's on the right path.

A year ago, CAPS member checkers9596 recommended giving Towne's CEO the time needed to correct the course it was on.

The president (ceo) of this bank has a proven history. His last venture was locally Commerce Bank which was eventually bought by BB&T. This guy has worked the bank from the ground up. He is our local banking "Buffett". He is not in it to fail.

Add the banker to the Fool's free portfolio tracker, and tell us on the Towne Bank CAPS page whether you think he's performed his job and is now ready to reap the rewards.