Alyce Lomax and W.D. Crotty love two Motley Fool Hidden Gems selections -- RedEnvelope and Fresh Del Monte. While Tom Gardner's Gems recommendations are up by an average of 31% since the newsletter's inception versus a 1% S&P 500 gain (calculated conservatively using the arithmetic mean), these selections have not been barn-burners for Tom. Fresh Del Monte is beating the market by five percentage points. And, get this, RedEnvelope is losing to the market by 39 percentage points. It's been Tom's worst selection to date. Why are Alyce and W.D. fond of these companies? Read both articles and then vote for which company you think has more upside.

Red signifies both love and war. There may be a lot to love about upscale gift retailer RedEnvelope (NASDAQ:REDE) yet, despite its recently bloodied state. Can this Hidden Gems stock be redeemed? Its share price has been depressed since January, when the company said serious execution problems led to a major setback in revenues and profits. Its holiday fizzled while rivals cleaned up.

Judging by its low trading volumes, the stock's pretty much been left for dead until next holiday season. But, the story may not be over for RedEnvelope, which represents one of the few Hidden Gems recommendations that's underwater (down 37% since December 2003). Given the current consumer climate, as well as the expectation that it will straighten itself out for the holidays, RedEnvelope stock may represent a value with impressive growth prospects.

W.D. Crotty may love Fresh Del Monte Produce (NYSE:FDP), but despite health trends and the admonition to "eat your colors," I can't accept that produce will produce such high growth -- and thus this duel. Reasonably priced gifts, ordered quickly over high-speed Internet connections for the convenience of speedy delivery, hold a lot more excitement than fruits and veggies.

Painting the town red
RedEnvelope's got some powerful trends working on its behalf. First off, more confident consumers have many retailers ringing up sales. Plus, its gifting mission includes its fair share of baubles, bangles, and beads.

Luxury retailers like Tiffany (NYSE:TIF) have been enjoying a resurgence of interest, with jewelry a hot ticket. Look at Blue Nile's (NASDAQ:NILE) recent IPO. After suffering through the recession, today's shoppers have a pent-up appetite for bling.

Forrester Research sees the market for online jewelry and luxury items growing at a compound annual growth rate of 25%, from about $2 billion in 2003 to $6 billion in 2008. RedEnvelope offers an extensive jewelry collection, and its red box and classy ambience implies a special gift without the daunting, Tiffany-esque price tag.

Who's red-handed?
Next, as RedEnvelope CEO Alison May said in a recent interview exclusively for Hidden Gems subscribers, the retailer's target is about 70% female, between the ages of 35 and 50. May expressed interest in attracting a slightly younger demographic, and to that I say, "Right on!"

The really attractive niche for RedEnvelope is likely between the ages of 25 and 35. These days, people finish higher education, marry, and procreate later in life, so that's the prime time for weddings, baby showers, and other such occasions that drive women to search for tasteful but affordable presents. Not to mention birthdays, graduations, and all the other events requiring a gift. For folks who are early in their careers, often single, and on a budget, Tiffany may be the exception, but it's certainly not the rule.

Also, most young people -- including boyfriends and husbands -- probably wouldn't want to go over the average RedEnvelope price point of $50 to $75 for birthday gifts and more casual occasions. When it comes to the young, wired shopper, the company may be onto something.

A red-hot climate
RedEnvelope's got an online presence just as more people are shopping through lightning-fast, high-speed connections with brand-new, speedy computers. Several years ago, plodding dial-up connections and old-school, sluggish PCs hung up websites, providing a substantial barrier to most Internet shopping... but say goodbye to those stumbling blocks.

Internet-only retailers (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) are also poised to win. However, here's another RedEnvelope specialty: Its products tend to lend well to personalization, and the Internet has always had a great deal to do with individual taste.

RedEnvelope caters to the "emergency" gift market, for those of us who are absent minded and often need gifts in a pinch. Again, the Internet presence is perfect for those who can't get away from the office or free an entire evening for a bricks-and-mortar shopping trip.

Other than the ebb and flow of healthier eating trends or occasional fad diets, Fresh Del Monte growth seems pretty stale compared to shoppers' new trend to e-shop till they drop.

Red flags?
Of course, there are several reasons RedEnvelope remains speculative. Not least of which is -- the proof's in the sour holiday pudding. Management says it's implementing new warehouse management software designed to help with order execution, but we won't know for sure until Christmastime.

There's been a lot of management turnover, with several members of the board of directors resigning around IPO time. The company also recently lost an individual who was arguably a visionary, Hilary Billings; she was most recently brand strategist, but also held other roles there over the years, including CEO and chief marketing officer.

A bubbling proxy fight has been started by a group of shareholders that includes former Chairman Scott Galloway and former CEO Martin McClanan; last I heard they had filed proxy materials with the aim of nominating an entire new board of directors.

Meanwhile, Alison May said that her company targets an "upscale" audience, as compared to Tiffany's "luxury" one. There seems to be a problem with semantics there, to imply that these are different niches. RedEnvelope needs to claim its own. For example, how about, "RedEnvelope is a classy but, above all, a reasonably priced venue for gifts"? Competing head to head with Tiffany seems a huge mistake, considering the latter company's sterling reputation and 167-year history.

Taking heart
Although RedEnvelope is still operating at a loss, it's also sitting on $27 million in cash and investments, and it has no debt. Yep, that's right -- no debt. That's one important reason for investors to look on it with a bit of optimism.

Meanwhile, some pretty formidable names have placed bets on RedEnvelope, solidifying its good grasp on the Internet space. Sequoia Capital is one example; it has invested in such successful Internet firms as Google, eBay's PayPal, and Yahoo! (NASDAQ:YHOO). That's some good company.

RedEnvelope did narrow its loss per share, although we know sales were up a scant 13%, a figure that we hope will increase given a better holiday season this year. Investors can celebrate gross margins of 50%, which are rather exemplary for retail, though it bodes well to keep an eye out for improvements.

What next?
Some marketing spending is expected in the second half of this year, as RedEnvelope plans to release a new catalog and embark on some new advertising endeavors that could include television, print, or radio ad campaigns. Good. It's time to strike while the consumer is red-hot.

What it doesn't need right now is the bubbling proxy fight mentioned above. Its leaders need to focus on making this winter the best holiday season in the company's history, instead of fighting amongst themselves. If there's a holiday slipup after last year's debacle, then the whole lot should be gone -- today's leadership, the board, and the founders of the company.

So, what with the great environment and the opportunities that await, the holidays are the true, big test. That's going to be when investors start to see whether RedEnvelope is really the undervalued gem we suspect it is. Though there are risks, at the current share price, the potential rewards could be great.

Next: Read W.D. Crotty's Fresh Del Monte's Ripe and then vote.

The potential payoff is what Hidden Gems investing is all about. Find out more about a no-risk, no- obligation free trial.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool is investors writing for investors.