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 less than 100 active recommendations on CAPS, despite earning analysts' estimates of double-digit long-term growth:

Stock

CAPS Rating
(out of 5)

Number of Active Picks

Estimated Long-Term Growth Rate

China Electric Motor (Nasdaq: CELM  )

*****

97

16%

Mindspeed Technologies (Nasdaq: MSPD  )

*****

80

20%

Parametric Technology (Nasdaq: PMTC  )

****

75

13%

Sources: 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
Maybe it's considered a play on China's new, burgeoning middle class, but China Electric Motor has captured the imagination of investors who've bid up shares 77% in the three months since the company's IPO. Surprising, really, because when it came to market, it wasn't seen as being a particularly successful launch. The company had wanted as much as $6 or $7 a share, but cut its asking price twice before going public.

Yet China Electric Motor's motors are used in everything from home appliances (which accounts for almost two-thirds of revenues) to auto parts, such as air conditioning fans and wiper motors (another 22% of sales).

The risk here is that its motors are very much a commoditized product with lots of competition, such as Harbin Electric (Nasdaq: HRBN  ) , Nidec, and Haier, but investors are already looking at it as a top microcap stock.

Maybe CAPS member egobasher was just being a contrarian curmudgeon in being the only one to have marked the motor maker to underperform the broader market averages, but everyone else who has rated it probably agrees with All-Star randomvariable.

I'm bandwagoning here, but this looks like a real company poised for some growth. I don't quite have the confidence to buy this in real life, though.

Playing mind games
Network equipment chip maker Mindspeed Technologies, a spinoff from Conexant Systems (Nasdaq: CNXT  ) , is seeing greater demand in wide-area networking communications. Its revenue increased 14% for the first quarter compared with the fourth quarter, and gross margins expanded more than even management had anticipated. It's scheduled to report second-quarter earnings next week, and partners like Cisco continue to benefit from Internet traffic growth, suggesting its own results may be equally good.

CAPS All-Star member nibs61 sees Mindspeed benefiting from the growth top-notch customers Cisco and Alcatel-Lucent (NYSE: ALU  ) are able to realize.

Great customers include Cisco, Nokia, [Ericsson] and Zhongxing Telecom. They are going to crank up revenues when this economy breaks and are priced right at the moment.

Drawing on its experience
Parametric Technology's software solutions enable customers to create digital product designs and component-based documents on their desktops or via the Web, and management believes it will continue to steal market share from rivals like Dassault Systemes (OTC BB: DASTY.PK) and Siemens. Indeed, it finds Dassault to be very vulnerable, and as management says, Parametric has the top product out there "moving at twice the velocity of everyone else," so it sees little trouble in making these big claims.

Surprising, then, that just 84% of CAPS members rating the CAD (computer-assisted design) company believe it will outperform the market. Head on over to the Parametric Technology CAPS page and add your own opinion.

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.

Dassault Systemes is a Motley Fool Stock Advisor recommendation. Buffalo Wild Wings and TransDigm Group are Motley Fool Hidden Gems recommendations. Try any of our Foolish newsletter services today, free for 30 days.

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


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