Hidden Stocks for High Returns

To paraphrase the song, 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. 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. Here you'll find two 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: Motley Fool CAPS.

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.

Lack of energy
Despite its name, Solar Capital is not an alternative-energy financing firm, but rather a business-development company that targets a broad range of leveraged companies across all industries. However, it finds most of its investments in the beverage, food, and tobacco field; energy, in fact, is one sector it hasn't invested in.

Finding tomorrow's growth stocks today is what BDCs hope for, and because capital is still scare for such small to mid-sized businesses, Solar Capital ought to be able to generate healthy returns on its investments. Like most BDCs, they pair debt or debt-like instruments with an equity stake in a growing company, and just as REITs pass onto shareholders 90% of their taxable income, BDCs offer a similar tax architecture.

Because they're structured as regulated investment companies, they can often offer a substantial dividend yield. Solar Capital currently yields 10.8%. But volatile markets can wreak havoc with such small companies, and American Capital (Nasdaq: ACAS) was brought to the brink and defaulted on its loans. It suspended its dividend in 2008.

Although chasing yield can be a dangerous game, the two dozen or so CAPS All-Stars are nearly unanimous in their view that Solar Capital will outperform the broad indexes. Let us know in the comments section below or on the Solar Capital CAPS page whether you think it has the power to avoid the fate of other BDCs, and add it to your watchlist to be notified of the latest developments.

Down but not out
Voice-guided navigation-systems provider TeleNav has benefited from the proliferation of mobile-communication devices, particularly through its contracts with Sprint Nextel and AT&T, which account for most of its revenues. But automaker Ford (NYSE: F) will become a key driver of future sales, as it is part and parcel of its in-car infotainment systems. TeleNav got crushed in July, when it offered up weak guidance, since the more integral Ford becomes to its success, the softer margins will be.

However, TeleNav lit up the tech world last month with news that it's offering an HTML5-based navigation service. Users won't have to use a separate app but will be able to get voice-guided turn-by-turn directions from within whatever program they happen to be using. And because it's browser-based, static mapping services like Google Maps, are left behind. We'll need to see how TeleNav profits from this, though, as it will be free to consumers and developers.

All 22 CAPS All-Stars rating TeleNav were guided by its prospects to rate it to outperform the markets, with TSIF finding plenty to like in the technical aspects of its situation as well. Even so, TSIF finds it a growing force.

TeleNav specializes in personalized navigation and location based services. There are several [companies], some new entering this field and barriers to entry seem small. On paper TeleNAV is rapidly growing [its] customer base and should have [recurring] services revenue. It does appear to maybe be spreading itself thin with the mobile advertising, but all segments seem to be firing currently. They have agreements with Sprint and AT&T and are targeting Ford.

Add TeleNav to your watchlist, and let us know in the comments section below whether providing its technology for free is the roadmap to success.

Keep a high profile
Although these promising stocks possess equally persuasive arguments for swearing them off, it highlights why you need to look beneath the headlines and press releases to get a fuller picture of where your money is going.

Looking where others ain't is how The Motley Fool uncovered two small-cap stocks with solid government deals that are ready to deliver multibagger returns. Check out The Motley Fool's free report "Too Small to Fail: Two Small Caps the Government Won't Let Go Broke." Get access to detailed analysis of these two companies -- it's completely free.