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: 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
Considering the list of Fortune 500 companies in its customer roster, it's surprising KIT digital doesn't have a higher profile. It's quite possible it will, sooner rather than later.

KIT identifies itself as the leading provider of "video asset management solutions" because it lets clients like Best Buy (NYSE: BBY), Disney (NYSE: DIS), and General Motors acquire, manage, and distribute video across various platforms, whether its personal computers, IPTV-enabled televisions, or mobile devices. In fact, it says it has more than 1,200 customers in 40 countries.

Not only have revenues been ramping up (they doubled year over year in the latest quarter), but KIT has been buying up the competition, and is considering spinning off some of its professional services and non-SaaS properties to focus on delivering its core business. It may have to watch out for Google, however, since the search giant bought one rival (On2 Technologies) last year, even though it currently remains one of its customers.

The field is growing more lucrative, too, according to AccuStream Research. The online media value chain is expected to generate $2.3 billion in revenues this year, a 40% jump over 2009.

CAPS member moneymcbags has been chronicling KIT's growth, and while bullish about its future, notes the extreme dilution the company has used to fund that expansion. Shares outstanding have doubled since just last December and are up more than 500% over the past two years.

Is growth at any price worth it? Only you can decide whether KIT digital is suited for your portfolio, but you can track it by adding it to your watchlist and having all the Foolish news and analysis about it aggregated for you in one place.

Rev those engines
Magic Software is another relative unknown with an impressive client list that's seeking to make a mark with its software applications. It's been using its position as an IBM (NYSE: IBM) software partner to blow out revenues and earnings.

Magic's uniPaaS and iBOLT platforms help businesses accelerate the building and deployment of applications that can be rapidly customized and integrated into existing systems. Last quarter revenues jumped 66% year over year and 24% sequentially. Operating profits tripled.

It's not magic, but those are just the kinds of things that CAPS member Clint35 looks for in an investment:

Small cheap and under-followed. Good balance sheet. Good free cash flow. Good margins. All the things I love in a good investment.

Head over to the Magic Software CAPS page and let us know if you think this company will be able to pull additional growth out of a hat.

End of times
Network equipment chip maker Mindspeed Technologies appears to be caught up in the turbulence created by Cisco (Nasdaq: CSCO), which hugely disappointed the market with its earnings report. While Mindspeed's own earnings beat expectations, its outlook for the fourth quarter was every bit as dour as its partner's.

Earlier this month, CAPS All-Star TMFZahrim said the stock's new, lower price made it a much better value:

The stock may have been a bit overheated earlier in the year when it traded for as much as 193 times trailing earnings and nearly 18 times book value. Today, Mindspeed is available for 12.4 times trailing earnings and less than 4 times book. Strong results and eminently reasonable multiples combined with an obvious knee-jerk overreaction combine to tell me that this is a terrific buy-in point if you believe in optical networking at all.

Add Mindspeed to the Fool's free portfolio tracker, then head over to the Mindspeed Technologies CAPS page and let us know if the chip maker can get back up.

Keep a high profile
We've had three stocks today that hold a lot of promise that investors want to get behind, but possess 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.