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 less active recommendations on CAPS, though the community thinks they still have outsized potential.

Stock

CAPS Rating (out of 5)

No. of Active Picks

Est. EPS Growth Next Yr.

CEL-SCI (NYSE: CVM  )

**

67

NA

Hyperdynamics (Nasdaq: HDY  )

****

88

NA

Oncolytics Biotech (Nasdaq: ONCY  )

**

55

(27%)

Source: Yahoo! Finance, Motley Fool CAPS.

Naturally, we want you to look a bit closer at these stocks before buying. Perhaps investors are staying away from these stocks for a reason. Make sure there's nothing seriously wrong with any company before you plug it into your own portfolio.

Under the radar
It's been a long, hard roll downhill for investors in CEL-SCI, who had pinned their hopes that its therapy for individuals infected with swine flu would actually materialize into a viable treatment. After the hysteria over H1N1 passed, so apparently did any impetus for CEL-SCI's stock. Shares have given up about three-quarters of their value over the past year, falling 43% so far this year alone.

With swine flu a back-burner concern, attention turns once again to CEL-SCI's Multikine head and neck cancer treatment, which it's been trying to get into phase 3 trials for a while. CEL-SCI says it was able to successfully manufacture the first lot of the drug necessary to run the tests at its new "cold fill" manufacturing facility. It expects testing to commence by year's end. Funded in part by Teva Pharmaceuticals (Nasdaq: TEVA  ) , the trials will seek to build on promising results achieved in phase 2 trials.

Investors hope their company will be the next Dendreon (Nasdaq: DNDN  ) in developing a cancer treatment, but it's likely they'll just be disappointed once again. One analyst has noted that CEL-SCI's claims about the efficacy of Multikine might be overstated. The sample numbers were small (just two patients out of 19 showed improvement); the patients were also treated with another drug at the same time, which was not controlled for, but may have had an impact in the results; and the study wasn't designed to measure survival rates, though that's what CEL-SCI is trumpeting.

Last year, CAPS All-Star member DarthMaul09 doubted CEL-SCI's ability to deliver a product worthy of the price appreciation at the time. These days, ChefDna hopes the phase 3 trials will prove the naysayers wrong: "The stars are finally lined up for Cel-Sci! When phase 3 trials show what Multikine is capable of, the orders, and CASH will POUR in."

Let us know on the CEL-SCI CAPS page whether you think the biotech is at the leading edge of a cancer breakthrough, or whether CEL-SCI's just engaged in sci-fi.

CAPS All-Star and biotech guru zzlangerhans seems to think Oncolytics Biotech will go the way of CEL-SCI with its approaching phase 3 trials for its own cancer treatment:

Two facts are sufficient to make Oncomurkics an avoid stock. One is that their entire pipeline is Reolysin, which is actually a virus that seems to preferentially infect and kill cancer cells with an activated Ras signalling pathway. It looks great in the lab, promising in early stage trials, but we know how that usually goes. Surprise and disappointment in phase III. The second fact is that this company is perennially short of cash, and is dependent on dilutive financings. They finished Q2 2010 with about 25 million.

Rev those engines
Perhaps Hyperdynamics investors should follow the lead of its CFO, and run away from the company, too. Just two weeks after being appointed to the position, the CFO up and quit. That's hardly going to inspire confidence in the oil and gas exploration firm.

Hyperdynamics operates in the high-risk, politically unstable Republic of Guinea in West Africa, where democracy is only just returning. West Africa's oil and gas reserves have attracted a lot of attention; CNOOC (NYSE: CEO  ) , China's state-owned energy company, was once interested in Nigeria's petroleum reserves, which Vaalco Energy (NYSE: EGY  ) currently produces oil in Gabon.

CAPS member iwanna10bagger notes that if Hyperdynamics can come through the turmoil in Guinea intact (though the CFO's actions suggest that's a pretty big "if"), it could find itself with a profitable niche business: "HDY has drilling rights in a large area of offshore Guinea, West Africa. If they strike oil, this could be a 10 bagger."

Keep a high profile
These three stocks have equally persuasive arguments for and against their future success. That's why you need to look beneath the headlines and press releases, and get a fuller picture of where your money is going. Check into Motley Fool CAPS, and tell us whether these low-profile stocks are on their way to higher returns.

CNOOC is a Motley Fool Global Gains pick. Try any of our Foolish newsletter services 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.


Read/Post Comments (6) | Recommend This Article (21)

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 August 13, 2010, at 12:01 PM, jeffrey1 wrote:

    Did the HDY CFO "run away" or was he ASKED to leave? HMMMMM

  • Report this Comment On August 13, 2010, at 12:44 PM, davelfla wrote:

    This is highly irresponsible "reporting" on the part of the Motley Fool, and I am surprised.

    HDY was doing just fine before O'Keefe came and is doing fine now that he is gone, As Jeffrey1 noted, you say he "ran away" but perhaps he was fired. To state it as fact is just plain wrong.

    Current management has set and met realistic goals, and as this is being written the first ever 3-D Seismic in those waters is getting underway.

    Yes this stock is speculative and is priced at about a buck ten for a reason, but that reason has nothing to do with O'Keefe or why his tenure at HDY was so short.

  • Report this Comment On August 13, 2010, at 1:22 PM, granslam wrote:

    I would suggest that whoever wrote this article check with the company about the CFO leaving. The spin is that he left because there might be problems with HDY. To my knowledge, the company is in great shape, well managed and working towards a drill bit breaking ground next year. If you do a little research on the CFO's packing, you might find out that he was dismissed.

  • Report this Comment On August 13, 2010, at 2:05 PM, TMFCop wrote:

    Okay, I'll grant that maybe he was "fired" or "asked to leave," but whether he walked away or was pushed, that doesn't seem to bode well for Hyperdynamics.

    Two weeks on the job and you're firing your CFO? What would that say about their due diligence before hiring him?

    When they hired him he was a "key addition to their management team," having worked at BP, Ivanhoe Energy, Sun Oil, and others. Now he's persona no grata? If he was fired, that would raise just as many questions about management as him fleeing and doesn't instill much confidence in the company.

    Rich

  • Report this Comment On August 13, 2010, at 4:03 PM, davelfla wrote:

    Rich - There are certainly questions surrounding his leaving and right now we don't know what the company can or can't say contractually. This is perhaps the first misstep of any note by the new management team in a year, and I am willing to give them a pass on it. Part of that is because I know the CEO well and I have a trust factor that an average investor would not have.

    I would like an explanation and I am hoping we will hear as much as they can tell us at their web-cast on August 24.

  • Report this Comment On September 07, 2010, at 12:56 PM, davelfla wrote:

    Rich.... any update on your take? HDY seems to have weathered the non-storm of a "bad fit" CFO leaving after a month on the job. Things are looking pretty good as jv partner Dana is publishing prospect figures for Guinea as they try and stave off a takeover, and 3-D Seismic progresses on schedule.

    I have no idea why the price is up 20+ cents in the last 5 trading days, other than it is getting to where it should be.

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