Hidden Stocks for High Returns

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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. 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.

Stock

CAPS Rating(out of 5)

No. of Active Picks

Est. EPS Growth Next Yr.

Allot Communications (NAS: ALLT) ****9533%
Sequans Communications (NAS: SQNS) ****83N/A
Six Flags Entertainment (NYS: SIX) ****301194%

Source: Motley Fool CAPS. N/A = 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.

Dialing up growth
Analysts are worried that plans by Verizon (NYS: VZ) and AT&T to curtail capital expenditure programs will derail the growth of high-speed networking equipment maker Allot Communications. Particularly in regards to 3G spending, Verizon says it will be spending less in the second half than it did in the first. With capex spending in the first two quarters of 2011 totaling around $5.4 billion, the $1.8 billion it spent in the third means there will be a significant reduction in the fourth quarter as well.

It's not necessarily a one-to-one situation, but analysts figure if U.S. carriers are cutting back, then it's going to happen in Europe as well. Allot derives 60% of its revenues from Europe, the Middle East, and Africa, and only 18% from the Americas.

Still, smartphone adoption and proliferation is growing strong and provides large upside potential for Allot since it offers IP optimization and revenue generation solutions for fixed and mobile service providers.

CAPS members are supportive of Allot's prospects, with 95% of those rating the equipment company to outperform the broad market averages. Let us know in the comments section below or on the Allot Communications CAPS page if investors will reach out for the stock. Also add it to your watchlist to be notified of the latest developments.

Down but not out
When Sprint  (NYS: S) chose to virtually abandon WiMax for long-term evolution, or LTE, technology, supplier Clearwire (NAS: CLWR) was left out in the cold. 4G wireless specialist Sequans Communications has been in a rush to add LTE products to its portfolio of WiMAX offerings, but because of the preponderance of the latter within its operations, it's taking a toll on performance. Its shares trade for just a quarter of the value they held at its peak.

Handset maker HTC is Sequans' biggest customer, and margins have taken a hit as HTC has met the conditions to receive volume discounts from Sequans. But Sequans also warned that future sales growth will likely slow as a great deal of uncertainty remains over whether new models will be introduced in the North American market, where LTE is gaining better traction. Trial lawyers have filed class action lawsuits against Sequans, arguing that the company failed to disclose declining WiMax sales and that HTC was adopting more LTE technology.

Still, the Chinese government recently approved its LTE chips, but that wasn't soon enough to help third quarter earnings, which showed a 14% drop in revenues, though it expects them to ramp up beginning in the first quarter of 2012.

With all the companies in the LTE space, however, CAPS member justaboutperfect thinks it will be difficult for Sequans to advance much further.

Weigh to many companies design, develop, and supply 4G semiconductor solutions for wireless broadband applications. Steady increase in shorting this stock shows where the smart money must know something is wrong.

Add Sequans Communications to your watchlist and let us know in the comments section below whether it will be able to make the switch to the new technology.

Blame it on the weather
Theme park operator Six Flags Entertainment reported third-quarter results this morning that showed it handily beating analyst forecasts but suffering from a drop in park attendance. While rival Cedar Fair (NYS: FUN) reported through Labor Day that it had enjoyed a 4% increase in attendance at its parks, Six Flags said extreme weather affected its operations, as 40% of the time the storms landed on a weekend. Most notably was Hurricane Irene, which hit at the close of the season. Although there was no damage to its theme parks, closing them on a late summer weekend hurt. It's reminiscent of the blizzard that shut down the East Coast last winter right before Christmas.

The market is obviously taking that into account as shares are up 7% as of this writing. I rated Six Flags earlier this year to outperform the market because insiders were buying up large tranches of stock, but suggested last month it might represent a chance to pick up shares on the cheap. That could be why all nine All-Stars rating the thrill park operator think it will take a roller-coaster ride higher.

Add Six Flags to the Fool's free portfolio tracker and tell us on the Six Flags Entertainment CAPS page if you think this won't result in a parachute drop.

At the time this article was published Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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