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. Let's look at a few 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.


CAPS Rating(out of 5)

Number of Active Picks

Estimated EPS Growth Next Year

Datalink (NAS: DTLK)




Insmed (NAS: INSM)




Marathon Petroleum (NYS: MPC)




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.

When you're hot, you're hot
Despite the market turmoil, corporate data center specialist Datalink should be able to navigate the churning waters as it helps companies optimize their storage and cloud-computing needs. Its earnings report last month found it far outstripping analyst expectations and raising guidance for the third quarter by as much as 72% on an adjusted basis (and "just" 30% higher on a GAAP basis).

Even so, it faces a crowded field of competitors who are also targeting the hot segment, and some analysts think the industry can't support all that attention. Pacific Crest Securities, for example, cites eroding IT industry fundamentals in downgrading some of Datalink's rivals, including Riverbed Technology (NAS: RVBD) .

Business "softened dramatically" at NetApp (NAS: NTAP) in July, the company reported in its quarterly earnings report, giving credence to the view that maybe everyone was going to get taken down. The release showed that as July progressed, sales grew at half the rate they did in May. Management said it couldn't tell yet whether it was going to have to revise guidance for the year, but the market was taking no chances and dropped the stock 14%.

With 95% of the CAPS members who've rated Datalink saying it will outperform the market, they undoubtedly agree with the assessment of fellow CAPS member pulsestar, who points to the company's clean balance sheet and ability to surprise the critics: "No debt, beats earnings consistently, high growth rate. Winner!"

You can beat them to the punch by adding the data-center speciality to the Fool's free portfolio tracker and sharing your opinion on the Datalink CAPS page.

Under the hood
After seeing its stock crushed on the news that the FDA was forcing Insmed to put on hold its lung-infection therapy Arikace until it could examine more closely how it affects rats, investors were clinging to any hopeful sign of a turnaround. That's why, almost two weeks later, they were driving the stock higher after the company announced that its CEO would make a presentation at an investor conference.

Apparently not much was revealed at the conference, which was held a few days ago, because the stock hasn't moved all that much except down. That's just as well for investors who might still want to get in on this otherwise hidden opportunity.

Insmed indicated that it's looking forward to getting its trials back on track sometime during the fourth quarter of this year, which suggests that it's hopeful that the FDA will respond soon to the data it was given. Matching up Arikace against the inhaled tobramycin treatment Tobi from Novartis, a twice-a-day therapy for cystic fibrosis, Insmed's once-a-day Arikace has thus far compared favorably, and the phase 3 studies it's waiting for the FDA to greenlight are designed to showcase this. With a potential $1 billion addressable market, Arikace would catapult Insmed to the forefront.

Even CAPS All-Stars are bullish on the opportunity Insmed represents, since 83% of those rating the biotech think it will beat the broad market averages. Give us your opinion on the Insmed CAPS page, and add the stock to your watchlist.

This is no lemon
Now that Marathon Oil has split in two and set itself up as an independent upstream company, Marathon Petroleum is established as the largest independent refining and marketing company in the country.

Its refineries have taken advantage of cheaper crude blends and higher fuel prices, allowing profits to nearly double. While economic concerns here in the United States as well as in Europe upended the markets yesterday and created a bit of volatility over the past week or so, the longer-term outlook for refiners like Marathon, Valero (NYS: VLO) , and Western Refining (NYS: WNR) makes the recent weakness their share prices have experienced an attractive opportunity.

Marathon is new to the market, but Valero and Western look ready to make a return trip to the lows they experienced last year. At just five times forward expectations, though, and comparing that with analyst earnings forecasts, these stocks are cheaply valued, with Marathon carrying the greatest discount.

CAPS member dsmo06 has concerns with looking too far ahead in this market segment, but right now he sees Marathon as the top dog.

MPC is likely the best performer in a terrible industry. In the short term, MPC's refineries are well-positioned to take advantage of great crack spreads in the Midwest. Several of MPC's refineries are excellent (and very profitable) operations.

You can add Marathon Petroleum to the Fool's free portfolio tracker to see whether it will crack the top echelons of its industry.

Keep a high profile
We've had three promising stocks today that investors want to get behind but that 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.

Check into Motley Fool CAPS, and tell us whether these low-profile stocks are on their way to higher returns.

At the time thisarticle was published The Motley Fool owns shares of Western Refining. Motley Fool newsletter services have recommended buying shares of Novartis and Riverbed Technology. 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 has no financial position in any of the stocks mentioned in the article. You can see his holdings. The Motley Fool has a disclosure policy.

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