Hidden Stocks for High Returns

Although some investors pile into 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.

Stock

CAPS Rating (out of 5)

No. of Active Picks

Est. EPS Growth This Year

Atlantic Power (NYSE: AT  ) ***** 91 73%
Diana Containerships (Nasdaq: DCIX  ) ***** 89 23%

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

Power to the people
Where utilities used to be considered "widows and orphans" stocks because of their stability, reliability, and conservative nature, today they can be almost as wild and wooly as any upstart biotech. Atlantic Power seems like most utilities these days: Despite retaining heavy exposure to traditional sources like gas, coal, and hydropower, it also dabbles in biomass fuels, owning a biomass power plant developer, and owns several wind power projects. In all, it own 31 power plants in 11 states and two Canadian provinces, as well as an 84-mile transmission line in California.

Atlantic has also been using a growth-by-acquisition strategy to enhance its profitability. Last year it bought Capital Power Income, a power generation company with facilities in Canada and the U.S. that had a total net generating capacity of 1,400 megawatts, and earlier this year it invested $23 million to become the majority owner of Canadian Hills Wind, a 300-megawatt wind power project in Oklahoma. It's also building a new biomass power project.

Some analysts, however, have expressed concern that utility operators with more exposure to fossil fuels remain less attractive investments, though some like Atlantic, National Grid (NYSE: NGG  ) , and Duke Energy (NYSE: DUK  ) that have favorable rate cases where they operate remain attractive. With a dividend yielding north of 8%, almost double Duke's 4.5% dividend yield and ahead of National Grid's 7.6%, Atlantic is compensating investors for the exposure.

CAPS member snapperreef appreciates the broad diversity of its operations and its dividend, but tell us in the comments section below if you think Atlantic Power can continue to buy its way to new growth.

Sail on, sailor
Also offering up some pretty high payouts is shipper Diana Containerships, with a dividend yielding just shy of 20%. Yet chasing yield is a dangerous pursuit, since high-yield stocks can also be riskier, and with the glut of ships in the industry still weighing down dayrates, shipping is a risky place to put your money these days.

Yet Diana has done better than most in riding out the storm, and its shares are up 21% in 2012. They were actually a good deal higher than that last month, but it priced an offering of 8.1 million shares at $6.25 a stub and investors diluted the stock. While Diana says it may use the proceeds to buy more ships, it hasn't identified any it really wants to take possession of. With $91 million in debt and $11 million in cash, it might do well to pay down some of its debt instead.

It did enjoy higher time-charter revenues last quarter, but that was the result of taking on new ships from Maersk; its TCE rates fell again in the quarter, having been up earlier in the year, even as operating expenses rose. As noted, Diana isn't in as bad a situation as some, as Genco Shipping & Trading (NYSE: GNK  ) suffered a 40% erosion in dayrates year over year, while Diana's rates were down 6% sequentially and 5% from last year.

Recognizing the dividend is at risk, Motley Fool Caps member Ikarruss believes it won't cut it off completely, and can survive on "any up swing in manufa[c]tured goods that are exported [anywhere] in the world" as they "would likely get shipped [through] Container Ships."

Use the comments box below to advise on whether you think Diana Containerships can maintain its current dividend and whether it really needs to be buying more ships at this point.

Keep a high profile
Dividends are indeed a healthy addition to your portfolio, but you needn't chase risky highfliers: the Dow index is home to solid dividend payers and The Motley Fool has identified three it says have the added benefit of sustainable business models built for the long haul. Get your copy of the free report "The 3 Dow Stocks Dividend Investors Need" today by downloading your copy now!

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of National Grid. 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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  • Report this Comment On August 10, 2012, at 3:01 AM, DrGoldin wrote:

    Aren't you afraid that AT won't be able to sustain its eye-popping dividend? I mean, just take a look at their recent payout ratios (and management's frank acknowledgment that payout ratios are going to have to remain high for the foreseeable future). If, as I fear, they'll have to slash that dividend one sad day, the share price is in for a tumble. It's not as though they have any cash to fall back on.

    And that's why I sold out.

  • Report this Comment On August 10, 2012, at 3:06 AM, DrGoldin wrote:

    P.S. You've overstated NGG's dividend yield. It's currently estimated at 5.79%, because their two annual dividend payments are not equal (and they haven't announced their second payout).

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