Hidden 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 Azz to Innophos. 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 100 or fewer active recommendations on CAPS, though the community thinks they still have outsized potential.

Company

CAPS Rating (out of 5)

No. of Active Picks

Est. EPS Growth Next Year

Acura Pharmaceuticals (Nasdaq: ACUR  )

*

76

NA

Dynavax Technologies (Nasdaq: DVAX  )

*****

94

53%

Flagstar Bancorp (NYSE: FBC  )

*

96

102%

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. Make sure there's nothing seriously wrong with the company before you plug it into your portfolio.

Under the radar
After an FDA advisory panel nixed Acura Pharmaceuticals' idea of bringing to market an addiction-resistant pain medication that it had been developing jointly with King Pharmaceuticals (NYSE: KG  ) , the stock dropped like a rock. It has no other drug on the market, and other therapies under development are still quite a ways away from approval.

CAPS member 6cents says whatever else Acura may have going for it, there's no catalyst right now to cause the stock to rise:

First thing, with the new insurance bill (that no one really understands) by the federal gov't. people are wondering. also the FDA just shot down there new drug. Nothing in the pipeline for near release. This company also deals in niche drugs. with the economy, stock market, and new reform bill. I can't see any real investment in the stock at this time.

However, Acura does have opportunities for long-term growth. For one, shortly after the FDA panel's decision, the two drug companies announced they were moving ahead with plans to file a new drug application for Acurox without niacin in early 2011. Niacin had previously been included, but the panel questioned its effectiveness. What they didn't raise were any concerns with the snorting and intravenous abuse limiting features of the primary drug.

Let's not forget the risks, though. Acura is highly dependent on King; if that relationship ever sours, Acura could be sunk. King has hedged its bets (OK, diversified) and is developing competing technology with Pain Therapeutics (Nasdaq: PTIE  ) . If they're ever more successful in developing opioid abuse deterrent technologies and products, King could pull up its stakes and move on.

Rev those engines
Dynavax certainly knows the tribulations associated with the FDA approval process. Its hepatitis B vaccine, Heplisav, that it was developing with Merck (NYSE: MRK  ) at one time had a clinical hold put onto a phase 3 trial because of a single case of a rare disorder called Wegener's granulomatosis. That partnership ended up being terminated, but Dynavax has been able to continue with the trials.

Dynavax's stock has bounced back thanks also to positive results in preclinical trials of a flu vaccine it's developing. It began phase 1 clinical trials in June, taking advantage of an agreement with Novartis (NYSE: NVS  ) . So certainly Acura could see some movement with positive early results with its tests.

Highly rated CAPS All-Star member zzlangerhans is hesitant to recommend investing here, though. With Heplisav solo right now, it faces the extremes of volatility, though he's hopeful the drug wins out:

There is clearly a long and rocky road ahead for Dynavax. But there's plenty of cash here and I expect the company to eventually report positive results from the phase III trial of Heplisav. At this entry point, I'm pretty confident I'll eventually get out with a positive CAPS score.

Sticking to it
Savings and loan Flagstar Bancorp knows a thing or two about volatility. After completing a 1-for-10 reverse stock split -- typically something companies do when in distress -- it reported a wider-than-expected loss last quarter that sent its stock into a tailspin. It's gained a bit back after analysts said the bank's credit trends were poised for a reversal to the good side. Remember when banks were staid institutions?

Skyshark29 thinks Flagstar has momentum moving its way now, and says there are indications the situation is stabilizing:

Things are starting to look up here, strong institutional ownership. Recent insider buying, although they were paying around .45 a share...

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 fellow investors have made, all from a stock's CAPS page.

Novartis is a Motley Fool Global Gains recommendation. The Fool owns shares of AZZ and Innophos. 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 here. The Motley Fool has a disclosure policy.


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