Hidden Stocks for High Returns

Like the song says, investors are looking for stocks to love in all the wrong places. They'll try to snatch up the ones 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 Autoliv to Nuance Communications. 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 brimming with promise. These companies have garnered 100 or fewer active recommendations on CAPS, though the community thinks they still have lots of potential.

Sources: Yahoo! Finance and 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 portfolio.

Under the radar
Was President Obama's Interior Department playing fast and loose with the facts when it pointed to a panel of experts to justify its six-month moratorium on drilling? Rather than supporting a ban, as Interior's report suggested, the National Academy of Engineering experts actually opposed it. Some are charging it was outright manipulation to sway public opinion on the matter and not the simple oversight, as Secretary Salazar has since said.

This isn't just a theoretical exercise. Cobalt International Energy said a deepwater drilling ban will cost local, state, and federal governments $106 billion over the next decade. Of course, following a judge's injunction of the moratorium, Obama has come back with a bid to ban drilling in any depth of water. ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) are sufficiently well-capitalized to survive a bad six months to a year, while smaller enterprises like Cobalt are going to have a harder time of it.

What Cobalt has going for it, says CAPS investor Geofiz, is strong financial backing and a significant lease agreement that can be sold off for profit.

Cobalt's share price has been blasted by the GoM oil spill and by recent marginal wells. However, the company owns a massive lease position in the Gulf subsalt plays, and will recover in time. I have confidence that they will eventually make numerous large, high quality discoveries, after which all or part of the reserve position will be sold off. Company is well financed by GS and others. 

Rev those engines
Spun off last year from pharmaceutical giant Bristol-Myers Squibb (NYSE: BMY), infant-formula maker Mead Johnson Nutritional has growth potential smooth as a baby's bottom, with 58% of its revenues derived from developing markets in Asia and Latin America. Trailing revenues in the segment last quarter grew more than 8%, while domestic sales fell by a like amount. Analysts now conjure scenarios of it getting bought out by a packaged-foods company like Heinz (NYSE: HNZ) or Nestle.

The CAPS community is pretty sure the maker of Enfamil will be walking on its own soon enough, though, as 86% of those rating Mead see it outperforming the broad market averages. Babies are big business, so let us know on the Mead Johnson Nutrition CAPS page whether you think it will be able to ride higher without getting adopted by some larger company.

Sticking to it
Cancer research always promises to be an area for exciting opportunities, but also dismal disappointments. YM BioSciences is long on potential, though short on actual results now. Its lead drug, nimotuzumab, is designed to treat epithelial cancers and be administered in conjunction with chemotherapy and radiotherapy. Here in the U.S., YM recently enrolled its first patient in a Phase 2 clinical study of nimotuzumab, but it has arranged licensing agreements for the therapy all around the globe. In China, for instance, it's been approved for nasopharangeal cancer, and for head and neck cancer in Argentina, Colombia, India, and Peru. 

Opinion on YM BioSciences is virtually unanimous as 90 of the 91 CAPS members rating the biotech believe it will outperform. CAPS investor JimVanMeerten recently added it to one of his high-risk portfolios, seeing a lot of technical support for the company. Give us your view of this stock on the YM BioSciences CAPS page.

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. You can read a company's financial reports, scrutinize key data and charts, and examine comments fellow investors have made -- all from a stock's CAPS page.

Autoliv and Nuance Communications are  Motley Fool Hidden Gems  picks.  Motley Fool Options  has recommended a covered calls position on Autoliv. Chevron and HJ Heinz are  Motley Fool Income Investor  picks. Try any of our Foolish newsletter services today, free for 30 days.