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 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.

Stock

CAPS Rating (out of 5)

No. of Active Picks

Estimated EPS Growth Next Year

ARMOUR Residential REIT (NYS: ARR)

****

85

22%

Primo Water (NAS: PRMW)

****

100

400%

Nova Measuring Instruments (NAS: NVMI)

****

94

NA

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.

When you're hot, you're hot
As the Obama administration continues to float greater government intervention in the housing market as a solution to the crisis, investors might want to consider it an opportune time to invest in any weakness shown by stocks that would be affected by the moves. In particular, mortgage REITs like ARMOUR Residential REIT and American Capital Agency (NAS: AGNC) are two examples of REITS that would react negatively to proposals for the government to step in and force lower interest rates.

The idea being floated is to allow homeowners to refinance at today's historically low rates. Right now there's no plan to automatically refinance mortgages, but the administration is looking for "targeted" areas. That would be bad new for ARMOUR and Annaly Capital (NYS: NLY) , which profit from the spread between their borrowing costs and the amount they can earn on their mortgage-backed securities investment. Just on the rumor that President Obama was floating a plan, the MBS market experienced one of its worst weeks in a year.

Such weakness could be a good time for investors to pounce. I'd argue there's little chance such a measure would pass Congress, because the amount of support to homeowners such a plan generates will be minimal while it would have the unintended consequence of wasting the MBS market. Moreover, even the higher rates people are paying today are quite low by historical standards. There's little economic sense to the move.

ARMOUR, with dividend yields just under 20%, might provide one of the best opportunities as its stock reacts to the proposals. It could be why all 19 CAPS All-Stars rating ARMOUR think it will outperform the broad market averages. You can build a case for growth on the ARMOUR Residential REIT CAPS page or add it to your watchlist.

Water, water everywhere
When you miss on revenue guidance, fall short on earnings, and undershoot the forward consensus, you have to expect that the market is going to tan your hide. And so it did to Primo Water, a distributor of purified water through thousands of retail outlets.

Unlike Poland Spring that delivers its multi-gallon jugs to your door, Primo choose to follow the Blue Rhino business model of swapping out empty propane gas tanks with new, full ones. Not surprising, really, since Primo's founder also started Blue Rhino, and today you can find Primo's exchange and refill stations at more than 12,600 retailers, including Lowe's, Wal-Mart, and Kroger.

While the last quarter was a bit of a bust, Primo has its sights set on other opportunities as well, including bags of ice and the DIY-soda craze started by SodaStream International (NAS: SODA) . Expect to find Primo's "Flavor Station" line of carbonating appliances with CO2 and flavors on store shelves this holiday season.

CAPS member ddbikessamsara thinks its existing water business, along with the new areas it's branching out into, make for a powerful stream of revenues in the future.

Looks to me like they have reached the threshold point for breakeven. If the growth develops as projected, the profits will be substantial from here. It's a huge market for water and for soft drinks. Primo's water is very affordable and convenient, becoming more so as they add locations rapidly. The new Flavorstation carbonation products will compete directly with Soda stream and that market is still in its infancy.

Drink in what others have to say and give us your opinion on the Primo Water CAPS page. Then go and add the stock to your watchlist.

Through a cracked lens
LG Display
(NYS: LPL) cut its capital spending targets for 2012 to its lowest level in three years, as the tablet computer boom -- really the iPad boom -- has cut into sales of LCD TV screens and computer monitors. That could be an issue for panel makers, which count on those two products for nearly 90% of industry sales. Semiconductor Manufacturing International, China's largest chip foundry by capacity, also cut its capex program, and though Intel says there's no change yet in its capex spending, its decision not to upgrade its Fab 24 chip plant to 22 nanometer production suggests that that might change.

All that underscores why Nova Measuring Instruments reported a disappointing quarterly report, which pointed to the slower spending industrywide after it started off the year at a gallop. Still, it thinks this is just a mid-cycle correction that will realign itself for the maker of integrated process control metrology systems that allow for the manufacture of such chips with precise tolerances to improve efficiency and yields.

At less than six times next year's earnings, Nova looks cheap, and that could explain the bullish stance of our CAPS All-Stars: Only one thinks it won't be able to beat the Street. Add Nova to the Fool's free portfolio tracker and measure its performance from here.

Keep a high profile
We've had three stocks today with a lot of promise that investors want to get behind but possess equally persuasive arguments for swearing them off. That's why you need to look beneath the headlines and press releases to get a fuller 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.

At the time this article was published The Motley Fool owns shares of Annaly Capital Management. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel and SodaStream International. Motley Fool newsletter services have recommended creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.Fool contributor Rich Duprey owns shares of Intel but has no financial position in any of the other stocks mentioned in the article. You can see his holdings. The Motley Fool has a disclosure policy.

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