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 Year

Est. EPS Growth This Year

EasyLink Services International (Nasdaq: ESIC  )

*****

54

45%

2%

Investors Real Estate Trust (Nasdaq: IRET  )

****

50

431%

2%

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 good reason, so make sure there's nothing seriously wrong with the company before you plug it into your own portfolio.

OMG -- it's a buyout!
Things weren't always so easy for EasyLink Services, a provider of supply-chain and on-demand business messaging services, as the patent infringement lawsuit it faces from J2 Global would attest, but accepting a $232 million buyout offer from Open Text (Nasdaq: OTEX  ) certainly helps out.

Yet none of the industry's players has been faring so well this year. Second-quarter earnings results for EasyLink saw revenues fall 6% with guidance for a $4 million drop in its annual revenue run rate. Both J2 and Open Text also saw weak results as well, and while two poor-performing companies becoming one doesn't always create a better outcome -- just look at the Sears and Kmart union -- the joining of these two companies should provide a stronger competitive front against J2.

Earlier this year, crowninshield said the year-over-year easy comparisons would be coming to an end for EasyLink and all but one of the few dozen CAPS members rating the messaging specialist had expected it to beat the Street. But let me know in the comments section below if this is a done deal, then add it to your watchlist to see if someone else comes along to offer a higher price.

A logical conclusion
The real estate investment trust market is subject to ebbs and flows like many sectors of the economy, and its returns depend on the trust's focus. Lately, REITs such as Annaly Capital Management (NYSE: NLY  ) , which invests in agency-backed mortgages, and shopping mall operator General Growth Properties (NYSE: GGP  ) have faced a tough market.

Federal Reserve policies have made the mortgage market a crapshoot, so shares of even a well-run REIT such as Annaly are essentially flat over the past year. General Growth Properties, although up 15% from the year-ago period, went through bankruptcy and spun off Rouse Properties together with 30 of its malls.

Investors Real Estate Trust has had a harder time of it. It invests in multifamily properties and office buildings in the Midwest but has seen its shares fall 17% in the last 12 months. Revenues inched up in the latest quarter while profits tumbled due to the decrease in gain on sale of discontinued operations. It's also suffering from elevated vacancy rates in its office buildings, even as its apartments enjoy a 93% occupancy rate.

Because the single-family-home market is likely to remain in turmoil for the foreseeable future -- some analysts say it won't recover for at least a decade -- the apartment market should remain strong. IRET's office business will probably see split results depending on the economy's own zigs and zags. For example, while its office space has only a 77% occupancy rate, medical buildings and industrial offices are around 94% occupied and even its retail space is at 87%.

Highly rated CAPS All-Star BillinOmaha has previously noted that IRET has a better chance of success because its properties locations offer better demographic trends.

I like the locations of the properties owned by this company, in the upper midwest where the employment rate has remained relatively low and is slowly decreasing. In fact, many of the states served by IRET are now actually INCREASING their populations --- much better than the DECREASING populations of some sun-belt, rust belt, and east coast states.

It's still underfollowed on CAPS, but only one All-Star sees it underperforming the indexes while a baker's dozen see it still going on to beat the Street. Add Investors Real Estate Trust to your watchlist and let us know in the comments section below if it can still build a future.

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

Looking where others aren'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: Two 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 Annaly Capital Management. The Fool owns shares of and has written calls on Open Text. Motley Fool newsletter services have recommended buying shares of Annaly Capital Management and Open Text. Motley Fool newsletter services have recommended writing covered calls on Open Text. 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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