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.

Source: Yahoo! Finance, 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.

Under the radar
Regardless of the politics behind withdrawing our troops around the world, the moves have to have an impact on many companies that supply the military with supplies and materiel. It's not just traditional military contractors like Force Protection (Nasdaq: FRPT) and OshKosh that might sell fewer mine-resistant all-terrain vehicles, or Boeing selling fewer jet fighters, even though they're the big-budget items that attract the headlines. Many smaller outfits consider military sales their lifeline, too.

BioTime sells Hextend, a blood plasma volume expander that's used when there's a lot of blood loss during surgery, typically because of trauma. Almost three-quarters of BioTime's royalty revenue comes from Hospira (NYSE: HSP), which sells the plasma to the military. Sales of Hextend fell 39% in the latest quarter primarily as a result of lower sales to the military.

Good thing BioTime began branching out into stem cell research last year. Its total quarterly revenues actually increased 57% in the quarter, partly because the company received its share of a quarterly grant that more than offset the decline in Hextend sales. Yet with nearly 60% of CAPS members rating BioTime to underperform the market, it seems some investors don't expect it to make the transition smoothly.

Although Rexahn Pharmaceuticals got all shook up earlier this year when its experimental depression drug Serdaxin failed to meet the main goals for a clinical trial, three-quarters of the CAPS members who rated the company are optimistic, implying there might be better luck in phase 2b trials of the drug for major depressive disorder.

Teva Pharmaceutical (Nasdaq: TEVA) has a private placement with the drug developer under which it funds research and development on preclinical drugs, suggesting it's hopeful as well. Tell us what you think about the stock on the Rexahn Pharmaceuticals CAPS page.

On to the next one
Biopharmaceuticals seem to be the theme here, and Rockwell Medical Technologies has attracted the attention of CAPS member kayceygirl, who applies a multiprong test to identify potential investments.

Rockwell's therapies target end-stage renal disease, chronic kidney disease, and iron-deficiency anemia, but its primary drug, soluble ferric pyrophosphate, also failed a main, early stage goal that measured its effectiveness, although it did meet other goals. When Rockwell got together with Food and Drug Administration officials in July to discuss its planned phase 3 program, the agency said a change in hemoglobin would be an approvable end point for the clinical trial.

Of the CAPs members who rate Rockwell, more than 93% pick it to beat the market. Some indicate that with dialysis facility operator DaVita (NYSE: DVA) as its biggest customer, serving about 117,000 patients in 1,500 clinics, it has a chance of breaking the cycle of failure.

Keep a high profile
These three stocks hold a lot of promise and some investors want to get behind them, 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 better 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.