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 Fossil to Under Armour. 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 three 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.

Stock

CAPS Rating
(out of 5)

No. of Active Picks

Est. EPS Growth Next Year

8x8 (Nasdaq: EGHT  )

****

18

67%

Nymox Pharmaceutical (Nasdaq: NYMX  )

**

73

N/A

Tower Semiconductor (Nasdaq: TSEM  )

***

81

17%

Source: Zacks.com, Motley Fool CAPS.
EPS = earnings per share. N/A = not available.

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 a company before you plug it into your own portfolio.

Under the radar
The market is currently gauging VoIP provider 8x8 as a less obvious choice for tomorrow's great stocks compared to peers Vonage  (NYSE: VG  ) and Skype. By focusing almost exclusively on small and medium businesses, as opposed to residential customers, 8x8 was able to turn in record revenues last quarter as gross margins widened. It's flying off the screens for much of the market as well as Wall Street, but you can add the IP communications service provider to your My Watchlist page and have all the Foolish news and analysis about this stock aggregated in one place.

Rev those engines
That initial surge of enthusiasm following Nymox Pharmaceutical's report that its treatment for enlarged prostate performed well in late stage trials is apparently running into the reality of having to compete against larger rivals if it's approved. Nymox shares are down about 20% from their recent high.

Nymox's drug, NX-1207, reduced a patient's urgency to urinate by 52% after three months, compared with a placebo, in phase 3 trials, but Pfizer (NYSE: PFE  ) , Abbott Labs (NYSE: ABT  ) , and GlaxoSmithKline all manufacture alpha blockers or 5-alpha reductase inhibitors that could provide a serious wall to break through.

Right now, Nymox has been muddling through with sales of its NicAlert and TobacAlert tests to ascertain smoking status (parents, for example, can monitor whether a child is smoking while insurance companies can verify whether an applicant is smoking), and also markets AlzheimAlert to test for the onset of Alzheimer's disease. But the biotech is hoping to break through with its drug for benign prostatic hyperplasia (maybe they'll call it ProstAlert).

With more than one-third of the CAPS members rating Nymox voting it to underperform the market, it seems they're wagering that going up against the big pharmas might be a hurdle too high.

End of times
Famed value investor John Neff has criticized investors for thinking too linearly. He says they're great at drawing straight lines from prior results and extending them out into the future. Of course, markets don't work that way, and investors are often disappointed when their thesis doesn't work out.

So you might be tempted to criticize the CEO of independent semiconductor foundry Tower Semiconductor, who recently said he expected the company to hit its target of $500 million in revenues this year because it's already produced compounded growth of 40%, and if you stretch that out to the end of the year, you'd see it's likely to surpass that target number.

That might help explain why CAPS member ChrisHamiltonRN said earlier this summer that the company is in the early stages of a major leg upward:

This stock is a monster soon to explode. Read up on its latest news from the last few months if you're not a believer, including its last earnings report from May 12.

But Tower might also be banking on the growth SanDisk (Nasdaq: SNDK  ) is seeing in the NAND market. The chip maker is counting on growth in the consumer electronics market, and with demand for mobile handsets, flash memory cards, and tablet computers still strong, it's expecting to generate robust third-quarter earnings. SanDisk just so happens to be a major shareholder in Tower, controlling 12% of the company's voting shares.

Keep a high profile
We've talked today about three stocks that hold a lot of promise that investors want to get behind, but also possess equally persuasive arguments for swearing them off. It's why you need to look beneath the headlines and press releases to get a fuller picture of where your money is going.

Also check into Motley Fool CAPS and tell us whether these low-profile stocks are on their way to higher returns.

Pfizer is a Motley Fool Inside Value pick. Under Armour is a Motley Fool Rule Breakers recommendation. GlaxoSmithKline is a Motley Fool Global Gains choice. Fossil and Under Armour are Motley Fool Hidden Gems picks. The Fool owns shares of GlaxoSmithKline and Under Armour. Try any of our Foolish newsletter services free for 30 days

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.

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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