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 they 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.

Source: Yahoo Finance; Motley Fool CAPS. NA = not available.

The Motley Fool CAPS community knows a bargain when it sees one. Below, you'll find two 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.

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.

Keeping it clean
Environmentalists have argued that hydraulic fracturing -- the process of injecting water, chemicals, and fluids into rock formations to release oil and gas trapped therein -- is polluting drinking water. Those attacks have fractured the stocks of those servicing the energy industry. C&J Energy Services, one of the many players caught up in the fracking debate, has seen its shares fall by a third. Baker Hughes (NYSE: BHI), whose subsidiary BJ Services is a major fracking outfit, is down by 35%.

I've noted before that Heckmann, a water management specialist for the energy industry, scoffs at the notion that fracking causes such contamination because of simple physics: Fluids seep down, and fracking injects them far below the water tables. And now a study by the University of Texas also adds to the growing body of knowledge that fracking isn't harmful. It says there's no evidence pointing to fracking itself contaminating groundwater, though it does say other steps in the process could cause it. More likely, though, it's surface spills and naturally occurring gas seepage that cause the problems most people associate with fracking.

With C&J trading at a discount as it is -- and producing outsized profits the way it has -- it appears to be a stock worthy of a closer look. CAPS member marshgerda took a gander and likes what's there.

Very basic business model that makes money. For some reason, the street doesn't quite get that... yet. I am looking toward earnings to be a catalyst. this company went public 6 months ago at $32 and you can buy around $18, which is 7x trailing earnings and under 5x forward earnings. Toss in clean balance sheet and I am in with real money.

I've also marked it to outperform, but let us know in the comments section below if you think the anti-fracking contingent will successfully hold these companies back. Also add it to your watchlist to keep track of all major developments in the field.

Rising peptides lifting this boat?
In the eight months since we last looked at genomics-based drug and diagnostic discovery shop Compugen, Wall Street still ignores it, and only a handful more CAPS members have been added to the rolls of those thinking it will outperform the market. Yet the stock has surged 55% in that same period, compared to a 5% increase in the S&P 500.

I also noted back then that Compugen has signed agreements with big pharmas Pfizer (NYSE: PFE) and Bayer, as well as smaller biotechs Seattle Genetics and Flamel (Nasdaq: FLML). The deal with Flamel involves using Compugen molecules with Flamel's delivery technology, while the Pfizer deal envisions peptide product candidates turning into promising target drugs. While those partnerships could be worth money down the road, its drug candidates have yet to progress to a point where they're producing money for Compugen. Last quarter, Compugen recorded no revenue, and it admits it's going to be a hit-or-miss proposition.

It may have a small hit coming up, as it signed another agreement recently with DiscoveRx to market its novel peptides commercially. If successful, Compugen will receive licensing and royalty payments, but again, we'll need to wait to see the money start coming in.

All seven CAPS All-Stars weighing in on Compugen think it will be successful in outperforming the market indexes, as does the lone analyst following the stock. Add Compugen to the Fool's free portfolio tracker and let us know in the comments section below whether you think this is one Wall Street will be hurrying to catch up with.

Keep a high profile
Although these promising stocks possess equally persuasive arguments for swearing them off, this highlights why you need to look beneath the headlines and press releases to get a fuller picture of where your money is going.

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