Hidden Stocks for High Returns

Although some investors pile into the momentum stocks looking to ride the wave higher, others choose to buy into those overlooked by Wall Street and Main Street, preferring to find undervalued gems to invest in. The former flash and crash when the momentum goes cold; the latter have a better shot at delivering outsize gains over the long haul.

And 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, but the community thinks they still have outsize potential.

Stock

CAPS Rating (out of 5)

No. of Active Picks

EPS Growth Last Yr.

Est. EPS Growth This Yr.

Chesapeake Granite Wash Trust (Nasdaq: CHKR  ) ***** 61 NA 142%
XPO Logistics (NYSE: XPO  ) **** 46 85% 92%

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.

In cold storage
Natural-gas futures were overcome by the fumes of an inventory report showing that despite falling rig counts, warm weather and a weak economy continue to wreak havoc on pricing. Even though inventories are already at record highs and prices at levels not seen since 1999, natural-gas drillers continue to pump out more. Rig counts might be down 25% from the year-ago period, but inventories are running 45% above the high end of the five-year average.

Nat-gas stalwart Chesapeake Energy is looking for industry recovery to occur as a result of production cutbacks it and other industry players like Ultra Petroleum (NYSE: UPL  ) , Southwestern Energy, and Encana have initiated. But it's also turning its attention to the natural-gas liquids market, which can be used for purposes other than fuel and currently enjoys much higher prices than its dry-gas counterpart.

Chesapeake Granite Wash Trust, the royalty trust spinoff of Chesapeake Energy, is also focusing on oil and NGL if for no other reason than that the Granite Wash region where it's directed to drill is awash in such resources. Yet the market for trusts may be already played out. After peaking at $30 a share in mid-March, the trust's stock has fallen 18%. Similarly situated SandRidge Mississippian Trust I has also pulled back from its highs by a like percentage, while the Permian Basin Royalty Trust (NYSE: PBT  ) has eased back 7% so far.

Yet if the novelty has worn off, CAPS member chicagoadvisor succinctly sums up the bull case for the Granite Wash trust:

Trust spin off from Chesapeake with almost twice as many wells to be drilled than currently operating by 2016. Portion of production hedged in the trust as well, this looks like a rewarding dividend yield that will give the market something to chew on. I own it. I like it.

Let me know in the comments section below or on the Chesapeake Granite Wash Trust CAPS page if you'd trust your investment dollars here, then add it to your Watchlist to see whether this was just a fad that has already washed out.

A logical conclusion
"Past returns are no guarantee of future results" is standard boilerplate when it comes to investing. Just because a stock did well before doesn't mean it will do so again in the future. But when it comes to individuals running companies, I think it is possible to extrapolate into the future the handiwork achieved in the past.

It's one of the reasons I rated XPO Logistics to outperform the broad indexes on CAPS last year when I read that Bradley Jacobs was assuming the helm of the third-party logistics company. Since he had a hand in the successful operations of billion-dollar successes such as United Rentals  (NYSE: URI  ) and United Waste Systems (now part of Waste Management), I figured he'd be able to work his magic with XPO too.

Of course, you can't always win with such bets. Wayne Huizenga, himself a whiz at having brought Waste Management to its preeminent position, as well as having shepherded Blockbuster and AutoNation through their growth phases, seems to have fallen short with Swisher Hygiene, a full-service cleaning and waste solutions company that is going through some significant financial restatements. But the jury's still out on this one.

Yet shares of XPO have doubled over the past year and nearly quintupled in value since I picked it last July. (If only I had been so prescient to add it to my real-life portfolio.) Like Huizenga's, Jacobs' logistics and freight-forwarding operation likes to deploy a growth-by-acquisition strategy. Typically that leaves me cold because of the major hiccups it can cause (part of Swisher's problems stem from all the acquisitions it made), but when done properly, this can create a player with market heft, and XPO seems to have done it properly.

It's still underfollowed on CAPS, but 93% of those rating it -- myself included -- see it still going on to beat the indexes. Add XPO Logistics to your Watchlist and let us know in the comments section below whether you think it can still carry its growth prospects forward.

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

Looking where others ain't is how The Motley Fool uncovered two small-cap stocks with solid government deals that are ready to deliver multibagger returns. Check out The Motley Fool's free report "Too Small to Fail: 2 Small Caps the Government Won't Let Go Broke." Get access to detailed analysis of these two companies -- it's completely free.

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 Waste Management and Ultra Petroleum. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy, Waste Management, and Ultra Petroleum. Motley Fool newsletter services have recommended creating a write covered strangle position in Waste Management. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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