2 Hidden Stocks for High Returns

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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 outsized 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 outsized potential.


CAPS Rating (out of 5)

No. of Active Picks

EPS Growth Last Yr.

Est. EPS Growth This Yr.

Gabelli Equity Trust (NYSE: GAB  ) ***** 45 N/A N/A
GNC Holdings (NYSE: GNC  ) ***** 78 14% 38%

Source: Motley Fool CAPS. N/A = 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.

Trust me, it's an opportunity
Back before the Tech Wreck in 2000, I recall reading and hearing a lot more about investment manager Mario Gabelli than I do today (maybe my investment style changed), but his Gabelli Equity Trust is still going strong since it was founded in 1986, and the closed-end fund's shares are up nearly 6% this year compared to less than 5% for the S&P 500.

While closed-end funds are like ETFs in many respects, the difference is that CEFs have a fixed number of shares outstanding, leaving them susceptible to changing supply-and-demand conditions in the market. But you'll want to watch out for the high fees some charge. Equity Trust's fees are not outrageous, though, with an expense ratio of around 1.5%. A CEF's unique structure sometimes gives investors an opportunity to get shares at a big discount.

With an international portfolio of large-cap stocks, Equity Trust's investment objective is the long-term growth of capital, with income as a secondary objective. It seeks out undervalued companies with greater than average potential for growth. Swedish tobacco company Swedish Match was its largest holding, with U.S. termite and pest control operator Rollins (NYSE: ROL  ) and Deere (NYSE: DE  ) rounding out the top three.

What attracts many investors is its 10% distribution policy whereby it pays out to common shareholders 10% of its average net assets each year. Yet as the Fool's Dan Caplinger has reminded us, Equity Trust uses a managed-distribution policy, meaning that much of those distributions are really a return of capital rather than true income derived from the portfolio.

While Equity Trust  is flying under the radar, 82% of the CAPS members rating it see it still beating the market going forward, though the handful of All-Stars weighing in are almost split 50-50 on its prospects. Let me know in the comments section below or on the Gabelli Equity Trust CAPS page if closed-end funds are an area you're interested in investing in.

Tastes great, less filling
Vitamin and wellness product seller GNC is probably known more for its ubiquitous shopping and strip mall locations across the country than that it's been a publicly traded company for just over a year. Since its IPO, where shares were offered at $16 each, the stock has more than doubled in value. In comparison, rival Vitamin Shoppe (NYSE: VSI  ) is up a respectable 30% or so, but GNC has been the star, and despite the price appreciation, it still garners lower multiples than its competitor.

Last quarter it crushed analyst expectations and raised guidance for the year as the combination of comps and online sales provided it with healthy growth. Yet Motley Fool writer David Talley urges caution because its brick-and-mortar expansion plans will weigh it down in comparison to nimbler online rivals: "I see GNC's bricks and mortar operation struggling to compete with Internet retailers and an eventual closing of many stores as inevitable." If it wants to invest anywhere, it should put more into its website.

But with the stock easing back from its recent highs, CAPS member Wakester0 thinks it's a perfect time to bulk up: "20% projected growth y/y next 5 years, 19% ROE, but at a PEG of only .92. Picking up some on the pullback."

It's still underfollowed on CAPS, but only one All-Star sees it underperforming the indexes while almost a dozen see it still going on to beat the Street. Add GNC to your Watchlist and let us know in the comments section below whether you think it has a healthy future.

Keep a high profile
Although there are equally persuasive arguments for swearing off these promising 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 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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Related Tickers

10/21/2016 3:59 PM
GAB $5.33 Up +0.06 +1.04%
Gabelli Equity Tru… CAPS Rating: No stars
GNC $20.84 Down -0.76 -3.52%
GNC Holdings CAPS Rating: ***
DE $86.43 Up +0.32 +0.37%
John Deere CAPS Rating: ***
ROL $28.15 Down -0.05 -0.18%
Rollins CAPS Rating: ***
VSI $27.70 Down -0.25 -0.89%
Vitamin Shoppe CAPS Rating: ***