Low-Profile 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 ignore lesser-known opportunities for fear of straying from the crowd.

Yet the search for undiscovered jewels has informed many of our Motley Fool Hidden Gems picks, from Buffalo Wild Wings to TransDigm. Overlooked by Wall Street and Main Street, and thus undervalued, these stocks hold the best potential to deliver outsized returns.

The Motley Fool CAPS community knows a bargain when it sees one. Below, you'll find several under-the-radar stocks that brim with promise. These companies have garnered fewer than 100 active recommendations on CAPS, despite earning analysts' estimates of double-digit long-term growth:

Stock

CAPS Rating
(out of 5)

No. of Active Picks

Estimated Long-Term
Growth Rate

Oclaro (Nasdaq: OCLR  )

**

95

15%

Somaxon Pharmaceuticals (Nasdaq: SOMX  )

***

84

25%

Tower Semiconductor (Nasdaq: TSEM  )

***

62

15%

Source: Yahoo! Finance, 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.

Under the radar
Now I see. Oclaro makes optical components for use in high-performance fiber optics communication networks. There's a wave of consolidation taking place that increases the rivalries it will have to contend with. While it bought Xtellus with its wave select switching products that give it broad coverage in the field, Ciena (Nasdaq: CIEN  ) purchased the metro Ethernet networks business from bankrupt Nortel, which included its optical products line.

Increasingly, though, Oclaro looks to China and that country's investments in its wireless networks for expansion. From less than 10% of revenues back in 2005, China now accounts for almost a third of Oclaro's revenue.

CAPS member nvlystd became an Oclaro shareholder during that consolidation spree last year, and thinks the acquisitions it is making are positioning it for future growth. Member glenmayfield20, on the other hand, is enamored of its technology.

Don't sleep on this one
Similarly CAPS All-Star EgisCodr suggests you'll have many a restless night's sleep if you miss out on Somaxon Pharmaceuticals, the maker of the just-approved sleep aid Silenor. Insomnia is a $2 billion market, with French powerhouse sanofi-aventis (NYSE: SNY  ) in a dominant position with Ambien, which generated $806 million in revenues last year. But the potential for Somaxon, according to EgisCodr, is in the potential for it getting bought out.

FDA approved sleep aid. Safe drug profile. As effective as big name drugs with minimal side effects. Could become primary prescribed sleep aid long term. Near term, look for big pharma to come in and buy this out for $1B .

Investor interest in Somaxon is rising along with its stock price. Shares are 500% higher than they were just three months ago as a result of the FDA's move, and some feel there's the potential for additional monster gains.

A towering achievement
Because it's a pure-play foundry specializing in complex semiconductor manufacturing, Tower Semiconductor has been able to attract to it customers like broadband communications product makers like Atheros Communications (Nasdaq: ATHR  ) and Ikanos Communications (Nasdaq: IKAN  ) , both of which rely upon it and just a handful of other foundries to make all of their chips. That kind of customer loyalty has analysts taking note, though they do keep an eye on the high debt levels it carries.

CAPS member bottomtroll usually has a Buffett-like aversion to tech stocks, but Tower Semiconductor is one tech name he's willing to break the rule for.

finally coming around, and in a BIG way. new technology, new products, new business. the target is a modest $3.00 for the year. many see three times that in 2010. six times that by 2012. i'm not usually a tech buyer, but this one is a sure winner, especially at a difficult time for the rest of the investment world.

He's not alone as D265 was also skeptical at first, but the specialty foundry won him over. Not everyone's a convert just yet, by 93% of those that have rated the company believe it will be outperforming the market averages. I'm one that's also willing to wager it will outpace the broader indexes, so I headed over to the Tower Semiconductor CAPS page to also mark it an outperform.

Keep a high profile
Sign up today for the completely free Motley Fool CAPS service, and tell us whether these low profile stocks are on their way to higher returns. There you can read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page.

Atheros Communications, Buffalo Wild Wings, and TransDigm are Motley Fool Hidden Gems selections. The Fool owns shares of Atheros Communications.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 12, 2010, at 5:46 PM, shlantz wrote:

    Got 2 recomendations from Zacks & Charadan which target the price to 3$-3.5$.

    http://www.towerjazz.com/analyst-coverage.html

    Great CEO!!! Great Company...

    seems that the market didn't realized where this company is heading...

  • Report this Comment On April 12, 2010, at 5:53 PM, agewise1 wrote:

    I think the BUY recommendation on Tower Semiconductor is right on target. I too have been watching this stock since the fourth quarter reports and I like what I see. I believe the price now is very attractive and if the first qtr. revenue comes in at or above street expectations the one year Zacks target price will be easily reached Also, their CEO is a class act.

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