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 Prestige Brands to Seaspan. 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: Yahoo! Financial, Motley Fool CAPS. NA = not calculable.

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. Make sure there's nothing seriously wrong with the company before you plug it into your own portfolio.

Under the radar
Like much of the rest of the tech sector, shares of automatic test equipment maker LTX-Credence have fallen, at least in part because of the warning Intel (Nasdaq: INTC) issued about consumer demand for personal computers. Yet if the sector bounces back in the fourth quarter, as the chipmaker now predicts, LTX and others in the space, like wafer test specialist FormFactor (Nasdaq: FORM), could come along for the ride.

At less than four times 2011's earnings, LTX-Credence's shares look cheap, especially compared to its growth prospects. That's why CAPS member fiftyonepercent encourages investors to get in now:

Compare to peers, this stock is significantly undervlaued. Significant revenue growth with efficientcy gains through outsourcing have brought down th equarter breakeven to $35-$40M per quarter, Next quarter revenue estimate is $80M.

Only you can decide whether this type of investment is suited for your portfolio. If you're interested, add it to your My Watchlist page, and have all our Foolish news and analysis about LTX aggregated for you in one place.

Rev those engines
Like many other areas of the financial sector, Federal Agricultural Mortgage -- otherwise known as Farmer Mac -- has watched its levels of delinquencies over 90 days increase. While they're down sequentially, they're still higher than they were a year ago. JPMorgan Chase (NYSE: JPM) and Citigroup (NYSE: C) have similar problems. Despite many signs of an improving economy, it's possible this metric will deteriorate even further in Farmer Mac's impending quarterly report.

Farmer Mac did sidestep a lot of the financial shenanigans that tripped up Fannie Mae and Freddie Mac, and investors are generally bullish about its prospects. More than three-quarters of the CAPS members rating Farmer Mac believe it will outperform the market. liverless thinks Farmer Mac has learned from those poor investment decisions:

Such an interesting story. The company went to $2 in 2008 along with a lot of other lenders, but the reason they fell was not a bad loan book. They had put their excess reserves into Fannie stock and Lehman stock, and when those companies went down their capital and liquidity dried up. Company lends to farmers and has low loan losses, trades at 6x core earnings and has a book value of $17. With ag prices high and rising I think business will continue to boom.

End of times
If you just looked at August's earnings report from spinal-device maker Alphatec, it's easy to see why its shares have traded so low. Sales rose more than 50%, but at just $45 million, they wound up well below the $54 million analysts were expecting. Alphatec also ended up recording a net loss, compared to the penny per share in profit that analysts had anticipated.

That said, Alphatec's acquisition of Scient'x should eventually boost sales in Europe. While management issued a somewhat dour forecast for the rest of the year amid continued pricing pressure, Alphatec is also benefiting as doctors perform more spinal procedures.

With the acquisition behind it, and the holes in its management team plugged, CAPS member dtannen says Alphatec is ready to run now:

Initial problems with ScientX acquisition caused large decrease in price. Recently added former CFO of J&J-- probably the best managed company in the space. The ScientX acquisition gave the company significant penetration in ex-US markets which should be beneficial given dollar weakness.

Tell us in the comments section below whether you think Alphatec is an alpha dog in the medical device space. You can add your thoughts on the Alphatec CAPS page, too.

Keep a high profile
These three stocks hold a lot of promise, but possess equally persuasive arguments against their success. That's why you need to look beneath the headlines and press releases, to 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.