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 Dawson Geophysical to Sotheby's. 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.

Source: Motley Fool CAPS; NA = 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 the company before you plug it into your own portfolio.

It's a whiteout
Zach and Cody apparently have nothing on the "suite life" that 7 Days Group enjoys (you need to have kids to know that reference). The Chinese hotel chain operator is looking to benefit from new income tax laws the government announced raising the threshold for paying taxes from income of 2,000 yuan to 3,000 yuan per month. With a little more coin in the people's pocket, the lodging chain hopes they'll make more use of its cheap hotels.

That seems a pretty specious argument and doesn't warrant the big spike in 7 Days' stock price yesterday. If it were true, you'd also expect Chinese travel portal Ctrip.com (Nasdaq: CTRP) to enjoy a similar bounce as well, but it was only up 1.5% on the day. More than likely, with inflation spiraling higher as a result of the government's massive stimulus programs, paying for food and basic necessities would be what the poorest people in China will use the extra money for.

Yet the growing middle class in the country does create a better environment for 7 Days to grow and helps underscore why all the All-Star CAPS members rating the hotel chain unanimously agree it will outperform the broad market averages. Add 7 Days to your watchlist, then head over to the 7 Days Group CAPS page and let us know if it will continue growing seven days a week.

Under the radar
Like Annaly Capital Management (NYSE: NLY) and Hatteras Financial (NYSE: HTS), specialty financier Cypress Sharpridge Investment relies on Fannie Mae and Freddie Mac to guarantee the mortgages it invests in. Short-sellers have been targeting the REIT, which has benefited from the low-interest rate environment the Federal Reserve has created, but with Ben Bernanke saying that quantitative easing may finally come to an end soon, the prospects for higher rates may cause these companies' results to come up short.

Moreover, Fannie and Freddie have worn out their welcome in Washington after sucking up $154 billion in taxpayer support. Not only are some members of Congress looking to wean the two agencies off this largesse, but proposals to phase them out altogether are in the works. They've been primary pillars of support for the $11 trillion mortgage market, and some argue, the cause of that market's collapse.

Chasing yield can be dangerous, but with a yield approaching 20%, Cypress presents CAPS member docado333 a proposition that is difficult to ignore. And like 7 Days Group, CAPS All-Stars are unanimous in their opinion it will continue to beat the Street.

You can deposit your thoughts on the Cypress Sharpridge Investment CAPS page and let us know how fast Washington will work to repair the damage.

In hot pursuit
It's not like investment banks are held in high esteem as it is, considering their complicity in the implosion of the financial markets, but the double dipping on merger deals, which some accuse Barclays and Bank of America (NYSE: BAC) of, isn't winning the banks any friends either.

In the acquisition of Del Monte Foods by KKR, Barclays advised the Del Monte board and provided funding to the buyer, too. The bank's dual role led a judge to hold up the merger. Now shareholders are suing to halt the buyout of Emergency Medical Services by private-equity firm Clayton, Dubilier & Rice. That deal could face a similar challenge, because Bank of America's Merrill Lynch unit advised the EMS board on the offer as well as arranging financing for Clayton, Dubilier to close the deal. The shareholders also claim the deal was struck at a below-market price in order to aid EMS's largest shareholder, Onex.

Canadian private equity firm Onex is accused of wanting to get out of the investment quickly without regard to other shareholders. It holds 82% of the voting power in EMS, but only owns 31% of the equity. Analysts have estimated EMS could easily be worth north of $70 a share, but the deal is being rushed through at just $64 a stub.

There's strong bullish sentiment that EMS could beat the indexes, particularly since it's the leading emergency medical services provider. But you can watch how the legal drama plays out and whether the deal's allowed to go through by adding EMS to the Fool's free portfolio tracker.

Keep a high profile
We've looked at three stocks today that hold a lot of promise, and that investors want to get behind, but there are equally persuasive arguments for swearing them off. It's why you need to look beneath the headlines and press releases to get a more full 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.